Is Alice Springs a Great Place to Invest in Property?

Alice Springs, NT Australia

This is an article titled “A Place Called Alice” that appeared in the Australian Property Investor (API) magazine in November 2008.  I give my views on the Alice Springs property investment market.

Why do you invest in Alice Springs?

Because it’s a great place for investment. An old timer summed it up best. He’d been living in the Alice for over 15 years; had real estate holdings in exotic places like Hawaii. Here’s what he told me, ‘If I had just made all my investments in Alice Springs, I could retire today a very rich man.’ He told me this when I first came to Alice Springs in 1998. At first I didn’t know what he was talking about especially when there were old commission houses selling for $150,000 on Bloomfield Street. I thought to myself ‘who in their right mind would pay $150,000 for those houses?’ Now, those very same homes sell for well over $300,000! I wish I’d bought a dozen of them. So, just when I thought there was no room for upward growth, the Alice keeps on going strong. He was right, the Alice is a great place to invest.

How is the Alice Springs market performing and what are your expectations?

The Alice Springs real estate market is performing as ususal; strong. Housing prices continue to rise. For instance, we purchased a house in early 2007 for $465,000. It’s a 4 bedroom home with an in-ground pool and over 1000 square meters of land backing onto the golf course. You’d be hard pressed to find a home with all these features for under $600,000 today. Rents continue to rise. We purchased a house in late 2007 for $308,000 and rented it for 360 per week. The rent has gone up twice since then. First, to $380 and now it’s renting for $400 per week. I’m told that this is a relatively low rent for a 4 bedroom house in a nice area of town. My expectations are that the market will continue to be strong.

What sort of investments do you look for?

I look for positive cash flow investments. Are they easy to find? No. But, I keep looking and looking. If I could find residential property that paid me $1 a month after all expenses, I’d be excited. After all, there’s no limit to how many of these you can hold. But, the minute the equation goes negative, you start to hit a limit and the brakes go on your investment portfolio. I have yet to find a residential investment that generated positive cash flow from day one. Therefore, my residential portfolio has grown slowly. Today, most of my residential investements generate a positive cash flow. But, that’s only after several initial years of negative cash flow. I guess I need to read more books on how to get rich in real estate!

What are Alice Springs’ pros and cons?

Pros: Strong, upward growing market. Lots of opportunities.

Cons: Strong, upward growing market. Lots of opportunites.

I’m not trying to be funny here but, I’m reading a book that sums it up wonderfully. The book says the greatest risk in any investment is not the investment but … get this – the investor! Boy did that hit home for me. In other words, what might seem risky to one person may not be risky for another. It depends on the level of expertise and experience of the investor. So, I guess the greatest “con” for the Alice would be those people who cannot or will not see the opportunities before them. But, of course this is true for any place in the world I suppose. I just hope I’m not one of those people who miss the opportunities!

What are your investment philosophies?

My investment philosophy is fairly basic. Get advise from those who are doing what you want to be doing and/or those that have the lifestyle you want, then do what they do. I get a lot of my “advise” from reading. People who are living the lifestyle I’d like to have are writing it all down on paper. I probably read at least one book a month.

Are there any Alice Springs hotspots worth keeping a particularly close eye on?

I reckon the Gap Road area is a great place to invest. Many of the properties have been rezoned to commercial which gives the invester more options. Now, instead of being limited to residential zoning, the investor can operate a business from the premesis. Or, rent the property to a business which usually means a higher return.

What has been your best investment (in Alice Springs)?

Probably an industrial shed we purchased back in 2002. It was offered to me when the first buyer backed out of the deal. I bought the shed for $250,000 with an existing lease agreement for $29,000 per year. Tenant paying GST and all outgoings; except building insurance. I jumped at the deal. After investing in residential real estate for many years, I realized this was a better deal than anything I’d ever seen on the residential side. There have been a few rough spots where government funding was looking shaky, so we were in danger of losing our tenant. I think this is why the original buyer backout out. Too risky. But, it’s worked out well for us. A recent bank valuation of the property came in at $475,000 and we just signed a new lease for $45,000 per year. I could use a few more investments like this one!

The Day my Dad Lost His Job

Dad gets a pink slip.

“What a beautiful sunny afternoon.” I thought to myself as I waited for my ride home. Mom was going to pick me up from school. Kind of a treat because it beats taking the bus and it beats the two mile walk. The bus is not very exciting because we’re the last stop, so it seems to take forever. We can get home in about the same time by walking the two miles. So, some days when the weather’s nice – like today – my brothers and I just walk home. But, today was different. I was going to get a ride. Nice.

I was almost 16 years old and in my sophomore year of high school. It was 1976.

When the family car pulled up I noticed something wasn’t right. I could sense it. Then I opened the door and looked inside and discovered the problem. It wasn’t Mom driving; it was Dad.

“Hi Dad.” I asked/said as if I wasn’t sure who I was talking to. Why was Dad picking me up at two thirty in the afternoon on a weekday? Isn’t he supposed to be at work? Something was up. And by the look on his face, it wasn’t something good.

As I sat down in the front seat my Dad said something strange. “Take a look at that letter.”

I looked down and saw the envelope sitting on the front seat between us. It was odd looking mostly because of its color. It was pinkish and looked like one of those letters you get from the Internal Revenue Service telling you they found you owe 20 cents in back taxes from 10 years ago and if you don’t pay they’re going to have the county sheriff and his posse on your doorstep in 24 hours. It was funny looking.

I looked at the envelope and my first reaction was to ask a simple question but one that would fully convey my feelings, “Why?” I resisted asking because my Dad was not the kind of guy you questioned. He probably would have taken that simple question as back talk and if he perceives that I’m back talking then the conversation can take an ugly turn – against me. So, I resisted and picked up the envelope and pulled out the letter inside.

It was an awkward moment because I soon realized I had no idea what the letter was saying. How was I going to explain to my Dad I didn’t understand what the letter was saying? It was full of double talk and back speak (what’s that?) and big words that no one ever uses in normal conversation. So, after reading it I didn’t know whether my Dad got a raise or received a summons to go to jail. So, I just sat there and said nothing.

“Well, what do you think?” my Dad broke the silence.

“Think about what?” I responded dumbly.

“The letter!” his tone started to grow sharper. “What do you make of it?”

“Oh no. Here we go again with another parable from Dad.” I thought to myself angrily and a little scared. “Why doesn’t he just tell me? Why does he have to draw it out like this?

Then as I sat there thinking but saying nothing I heard him say, “I got laid off from my job today.”

My initial thought was relief, “Is that all? Big deal. Don’t worry about it.” But, I quickly held that thought inside because I could see it was a very big deal for my Dad. I was to find out over the course of the next year or so just how big a deal it was to him. But, from my vantage point, it was just a job. If you lose your job don’t you just go out and get another one? Besides my Dad used to complain a lot about his job. Complain about some of the people, about some of the conditions about pay. Heck here’s his chance to get out of that situation. Here’s a chance to start something new.

Dad was waiting for my response. I thought of some possibilities …
“Wow, I’m sorry to hear that!” or “Great, now you can start that business you’ve been talking about!” or “Have you got any other job possibilities lined up?” or maybe “Is that good news or bad news?” I was striking out again. It was like when you meet the next of kin at a funeral – what do you say?

I finally stopped my random thought generator and out popped the final selection as I asked sheepishly, “So, what are you going to do now?” Sorry, folks. That’s all I could come up with at the time. I was lost. I didn’t really want to talk about it. I wanted to talk about baseball. The Red Sox. Something sports related. Something exciting. Not job layoffs. I was in high school. I wanted to talk about how to meet girls. Why couldn’t my Dad give me some pointers on how to talk to the girls and get dates? Can’t we talk about job lay offs later – much later? How about never?

“I’m going to find another job; that’s what I’m going to do!” my Dad shot back. If he was a weapon he’d have been a machine gun and I would have been full of holes! His response was rapid fire. As if he’d been waiting at the pass for me. Waiting for me to come around the bend and then open fire with everything he had. I could sense his frustration. His feeling of betrayal. His lack of belonging. His being left outside in the cold. He somehow managed to convey all that in his short burst response.

I knew he wasn’t upset with me. He was just upset. He was knocked off balance. I could feel his pain all he way over on my side of the car. I tried to push myself closer into the door to try and escape the negative atmosphere.

The conversation ended. We sat silently for the rest of the ride home.

I’ve never forgotten that day. It left a big mark on me.

The layoff had a long lasing effect on my father. Years later I remember Dad saying, “I never recovered financially from getting laid off.”

I vowed to myself to never let a job have this much control over my life. I never wanted to be in the situation my Dad was in.

How could my Dad let his job dominate his life so much? It wasn’t his passion. He didn’t speak highly of his job. Then why was his life so dominated by it? Why wasn’t his life dominated by something he loved and truly believed in? Why was his life dominated by something so dreary? Something he positively didn’t like and couldn’t wait to retire from? Why was my Dad so much like the millions of other people out there who are clinging for dear life to a job they hate? Why? Why? Why?

How come my Dad wasn’t working at something he loved to do? He loved working on machinery. He loved designing electronic systems. He loved to build things. Anything from handsets to houses. He loved beautifully designed buildings. He loved the science of architecture. Why didn’t he have is own business working at something he loved? Is there a law that says your vocation cannot be something you love and are good at? The way people seem to flock to jobs they don’t like, you’d almost think there was!

What is the lesson of this story ….

I vowed to never let a job have this much hold on my life. I never wanted to be in a situation where my job was my whole life – directly connected to my self worth.

Australian Property Investor (API) Interview Questions

That's me. Photo shoot for the API magazine article.

I was asked by the Australian Property Investor (API) magazine to assist with an article. Jeremy from API sent me the following interview questions and the answers provide a good insight into my property investment background and philosophy. Only a small portion of the interview appears in the article. I thought I’d include the entire interview answers for completeness.

The finished article appearing in the March 2009 API issue on page 22 and is titled “THE DUEL IN THE DESSERT.”

January 9, 2009

Hi Dave,Thanks for helping me out with this. Much appreciated. As I mentioned before, the article is basically a comparison between two different investment strategies and I would like you to make the case for positive cash flow properties. Just to give you an idea, your section of the article will probably run to about 1,000 words. I will re-write the information you send to use in the story and will also pull out some of it out to use as quotes. I will send you a draft of the article to check over before I submit it for publication.Okay, here are a few questions:

1. Can you just tell me a little bit about your investment history? How did you start buying property? When did you start? Why did you start? How many properties do you own? Are the properties all in Alice? If not, where are they? That sort of thing.

I started buying property in 1984. I came home on military leave and my parents told me they were heading to Florida to look at land. “Do you want to come along?” they asked. Here was the deal: Airline ticket from Boston to Orlando return. Airport pickup and transport to property over near the Gulf Coast in Citrus County. All meals and one night hotel included. Price: $100. Even on my military pay, this was a deal. “Sure, Mom, count me in!” I replied and packed my bags. I had no intention of buying anything.

We flew out Saturday morning and when we were on our way back home Sunday afternoon, I was the proud owner of a one acre block of land in Citrus County Florida.

By the time they finished wining and dining me, I would have bought anything they had to sell. My parents bought a block and my mother loaned me the $1,200 down payment so I could get one. I was now a proud land owner and saddled with an $11,500 debt.

The development was more or less a big sandlot. One acre blocks of land – mostly sand – marked out along newly paved streets. “One day there’ll be houses for as far as the eye can see.” The salesman assured us. I wanted to believe it and I felt pretty good about the purchase because I owned something; something I could one day build a house on.

That’s how I got started in real estate. Not very sophisticated. Not well thought out. But, at least it was a start. Sometimes in life, getting started is the hardest part of any venture. I was past the hardest part.

Today, my wife Marieta and I own two three bedroom homes in this residential area. The sand is gone – replaced by green lawns, golf course, activities center, pools and many many nice upscale homes. Both properties are rented and are cash flow positive.

We moved to Australia in 1995. Since then we’ve been very active buying and selling in the property market. Our current Australian property portfolio includes residential houses in Golden Grove South Australia, Enoggera and Pacific Pines Queensland, Rosebery (Darwin) Northern Territory and three properties in Alice Springs.

2. Why do you think buying a property that offers positive cashflow is such a good strategy?

Positive cash flow properties are self funding. They carry their own weight. Negative cash flow properties can become very heavy and your portfolio can collapse under its own weight if you’re not careful. Let’s do a thought experiment. How many properties can you carry if each one costs you $100 a month? I don’t know, but there’s a limit. You’ll eventually reach a point where you have to stop buying properties; the negative cash flow becomes financially crippling. Now, how many properties can you carry if each one is earning you $100 a month? Unlimited!

So, for me, the goal is to get a property cash flow positive as soon as possible. Ideally, it would be best to have positive cash flow from day one. That way you can begin looking for your next acquisition straight away. Otherwise, you may have to wait until you get a positive cash flow before moving on to the next property.

3. Could you perhaps illustrate why you think the above can be a good strategy with an example of a property you either own or have owned in the past? It would be great if you could give me some reasonable detail about the property, such as when you bought it, what it cost, what you rented it out for, whether you had any problems with it, what it’s worth now, and what it was ie how many bedrooms and bathrooms etc.

Like I said, ideally, it would be great to get positive cash flow from day one. But, if not, then the question is, “How fast can I get it generating positive cash?” Here’s an example of a property I’m working on now.

It’s a four bedroom house on about 500 square meters of land in Alice Springs. We purchased it in mid 2007 for $308,000. It seemed like the perfect rental property. Well maintained, rendered brick exterior. Big bedrooms, two car garage in a very nice quiet area of town. And, we knew it was a good price; three bedroom units were going for the same price.

The property was previously under contract but the deal fell through as the buyer couldn’t get finance. The owner then accepted our low offer as he was keen to sell.

Now the challenge. How do we get it cash flow positive? At the time, interests rates were 8%+, so it would take about $450 per week; way above market rate.

I approached the situation in stages. Step one; get it rented at the going market rate or better. So, our agent found a tenant at $360 per week. Now, at least we had cash flow. Step two, raise the rent and/or arrange for lower interest on the loan. Six months later, we carried out tenant requested repairs and upgrades costing about $1,000 and raised the rent to $400. The tenant was very pleased with the repairs and upgrades and didn’t mind paying the extra $40 per week because it represented extremely good value in the current rental market. Now, step three, the property is coming up for lease renewal in February 2009 and we’ll be looking for market rent. This should come in somewhere between $450 – $500 per week. Coupled with the lower interests rates – which we’ll lock in for three years – will definitely move this property well into the positive cash flow arena. It’s taken a while, but we got there.

4. Why was that particular property such a good investment?

It’s virtually a perfect rental property. All the modcons, good neighborhood and close to town. Purchased slightly below market value, it should provide a steady positive rental income for years to come.

5. Does the fact that you seek out positive cashflow properties mean you are happy to accept lower capital growth than you could have perhaps achieved elsewhere?

First of all, capital growth and positive cash flow probably don’t belong in the same discussion. Here’s why. Positive cash flow is in the here and now. You either have it now or you don’t. You can see it (or lack thereof) from day one. You can measure it from day one. You get out a piece of paper and you write down the expenses and subtract them from the income (rent). If the result is positive, then you’ve got a positive cash flow property, if not, you don’t.

Contrast that to capital growth. Next time you go to buy property and the sales person says, “Don’t worry about the cash flow. The capital growth on this property is going to be huge. In five years it’ll double in value!” Simply respond by asking, “would you mind putting that in writing and include it in the contract?”

Capital growth is speculation. You don’t know. And that’s fine. It’s just that you should realize this before making a buying decision.

Capital growth is great if you can get it. But, you have to wait and see; it’s not guaranteed. Look at all the capital growth they’re not getting in the United States these days! The housing crunch in the US may have a lot to do with people believing that capital growth is guaranteed. Many found out the hard way – it’s not!

I believe you first must have a plan to hold the property (positive cash flow) and then capital growth becomes a very pleasant unexpected bonus.

6. Has the positive cashflow strategy been your guiding light or are you flexible in your approach to property investing? Do you think different strategies work better for different people at different stages of their investment journey? Explain.

I’m very flexible when it comes to property investing. Positive cash flow is the ideal but it shouldn’t stop you from getting a “good” property. The catch here is – as always – the investor. What may be a risky and wealth sapping for one person may be low risk and high return for another. Again, let’s do a thought experiment. I have no mountain climbing experience. How risky would it be for me to climb Everest? Extremely. How risky would it be for an experienced climber who has climbed Everest several times? Same mountain, different guy. It’s no different with real estate. You’ve got to get experience. That may mean reading a lot of books. Learn from other people. That may mean making a few mistakes. I can assure you I’ve made lots of mistakes along the way! (And I’m still making them; show me somebody who’s not making any mistakes and I’ll show you somebody who’s not doing anything!)

I’d like to share an example I’m going through now. I’m purchasing a property for $450,000. It’s currently rented at $400 per week. Bad deal. Not even close to positive cash flow. Then why am I buying?

The owners are asking $480,000 but can’t get any offers. They’ve got three things working against them. First, the house is leased until Dec 2009. Owner occupiers are not interested in waiting a year to move in. The property therefore is not attractive to owner occupiers. Next, the rent is locked in at $400 per week. This return is not attractive at all to investors. Most investors are not interested in getting saddled to such a low return investment. Finally, the owners – for some reason – are keen to sell. Otherwise, why wouldn’t they just take it off the market and wait until Dec 2009 to sell? They would probably get market value and then some for this unoccupied, stylish, modern home in the golf course area. From these three negatives, I see a positive. Now, this involves risk.

My thinking goes like this. By Alice Springs standards, this house is cheap. It’s located in the golf course area and has all the features folks are looking for in a rental property: 4 bedrooms, large carport, modern ensuite and family bath, beautiful kitchen with modern appliances. Pergola, patio in the back. Nice fenced yard on one of the quietest, nicest neighborhoods in Alice Springs. The reason the property is going for a low price is the owners are not willing to wait. For whatever reason, they’re keen to sell and sell now. I like working with keen sellers.

Interest rates are low and rents are skyrocketing. So, we lock in the loan at a low interest rate. Then we endure the negative cash flow situation for 11 months. I look at this negative cash flow period as a part of the buying cost. It’ll run me about $5,000 to hold the property until Dec 2009. So, add this to the selling price and ask, “At $455,000, is this still a good buy?” For me, the answer is “yes!” Then in Dec 2009 we go market rent which should run very high.

Right now the market rent for this property is probably $550 per week or higher. That’s not based on theory, but on rental prices we’re seeing in town. We just leased a 4 bedroom golf course property for $600 per week. At this price, I thought we’d be waiting a while to get it rented. I also thought we’d have to negotiate the rent down to some lower figure. Not the case. We had two excellent rental applicants and both had no issue with the $600 per week rental price. Also, I heard recently a 2 bedroom furnished unit near the golf course has just rented for $400 per week. These are historically high rents.

Now, my question is, “How high will the market rent be in Dec 2009?” Therein lies the risk. It’s a risk I’m willing to take.

7. Can you just tell me a little more about yourself, please. It is just for background info that I can sprinkle throughout the story. What is your profession? Do you have any hobbies? How much time do you spend on property?

I started my career in the US Air Force. My career path took me to Woomera (South Australia) in 1990 where I met my wife Marieta. She was the hairdresser in town and I used to get my hair cut a lot! We then spent four years in the US before heading back to Australia. Now I work as a computer engineer but I’m looking forward to one day pursuing real estate investing full time.

I enjoy reading. Especially, war history, biographies and real estate. I’ve read a lot of books on real estate investing. My reading has had a big influence on my investment strategy. But, you have to balance theory with the real world. That involves getting out there and doing it; getting out there and making things happen in your own unique way. As such, everyone’s story will be different.

My time spent on property investing is fairly moderate. I normally read the real estate section of the paper every week looking for potential bargains. Then I may call the agents and look at a few properties that spark my interest. I just keep repeating this process and every once in a while I buy something.

And that’s it. Thanks, Dave. Sorry to have sprung this on you with so little time to work on it. It is just the way things worked out. Anyway, I look forward to hearing back from you shortly. Please drop me a line if you don’t think you’ll be able to get something back to me by tomorrow.Cheers,Jeremy

Job? What Job?

I lost my job in late 1994. We were living in Dayton, Ohio and I was working at Wright Patterson Air Force Base. The contract I was working under was coming to an end. Cancelled by the Washington bureaucrats. Our financial setup was such that I didn’t have to scramble for another job. My unemployment benfits would cover all our living expenses – mortgage, utilities, food and other costs. I also had other investments that were bringing in money. I invested $10,000 in a start-up computer store that was paying me a percentage of the turnover. This income made the transition period between jobs a lot less stressfull financially.

I was 34 at the time. My wife Marieta and I had one daughter and we were to find out shortly after losing my job, another daughter on the way. Things were going to get exciting but I’ll tell that story later.

This short article captures the phone conversation with my parents as I tell them I no longer have a job.

Now for the story …

The phone rang.  It was my mother.

“Oh, yeah Mom, we’re all fine. Doing great.” I stated matter of factly.

“And how are you and Dad? Enjoying life with all the kids gone?” I quickly threw back the conversation.

Mom responded by the book, “We’re fine too. Nothing much new here.”

Then a pause and finally out came the question she seems to always ask, “Oh yeah Dave, how’s everything with your job?

I mentioned months ago that my position was going away. The government program I was working on was losing its funding. My program was going against a big giant well funded high profile program. The story goes that a senator asked a simple question that killed our program. He said, “So, if we have this new standoff air-to-air missile system why do we need the F-22 fighter aircraft?” Good question Mr Senator, we’ll cancel the new missile system straight away!

I’d been looking for a new position but nothing was coming up. It was back in the early 1990s when engineering jobs were a bit thin. I was looking but Iwasn’t too anxious about it; if I found a job great, if not, we’d figure out a way to make it.

I answered my Mother’s question rather quickly, saying, “What job?”

“What do you mean ‘What Job’ David?” she replied in a ‘don’t joke with me fashion’.

“Mom, I told you before my job was going away. Well it went away about 2 weeks ago. I don’t have a job.”

I heard the phone on the other end drop. It was dangling by the chord. Then I heard my Dad’s voice, “What’s this about you not having a job?”

“Dad, it’s no big deal. They ran out of funding and I’m out of work. I’m not the first guy to get laid off from a job.”

“How come you didn’t tell me?” he growled.

“Dad, why would I want to tell you I lost my job? That’s not exciting news. I did tell you before the funding was going away. I figured that covered it. We’re fine Dad. Don’t worry.” I tried to convince him it’s no big deal.

My Dad switched gears from anger and dismay to sympathy, “You need some money?”

I have to admit, I really liked hearing him say that. We didn’t need any money, but what a feeling to know my Dad was right there if I needed him. That’s powerful stuff to know your Mom and Dad are there for you. I never wanted to take that for granted so I would only accept money if absolutely necessary. But, man is it great to know you’ve got family like that ready to help.

“Dad, we’re fine. If I needed money you’d be the first one I’d call.” I said with confidence. And I meant it. I wouldn’t hesitate to ask my Dad for money. But, I didn’t need any and it would have been irresponsible of me to accept money when I didn’t need it. Remember the story about the boy who cried wolf? I would only cry wolf when it’s for real.

What’s wrong with you son?

My Dad could not understand my calmness about losing my job. He also couldn’t understand how I could possibly survive financially without a steady income from a job.

This simple interchange with my father was one of the crowning moments of my financial life because I recognized I was in the process of developing the correct attitude and mindset for breaking away from the chains of the JOB (just over broke) condition.

I was not wealthy. I didn’t have a large savings account. But, my family and I were able to cruise through my short lived unemployment situation without missing a step.

I was proud of this accomplishment. And, I was looking forward to the day when I would take it to the next level and respond to a job layoff notice by saying, “Great, I’ll have more time to devote to my own business interests.” Or, maybe, “I’ve been waiting for an excuse to tackle a particular business venture full time. Thanks for giving me the push I needed.”