Blog: Risk is relative




Risk what does it really mean?

I've been an irrigation and dry land farmer for 30 years and have really enjoyed the life. Sure there have been plenty of up and downs over the years. We've had droughts, floods, hail storms, mice and locust plagues and also the rewards that good years bring.

So about 3 years ago after almost a decade of continued drought and no water allocation we decided we needed a change. You see, in NSW you have to pay for your water allocation wether you have the water or not! In our case this was about $100,000 per year for water you didn't have or couldn't use as there was no water in the Hume and Dartmouth Dams.

So we sold half of our permanent water allocation to get some cashflow and wanted to diversify.

My wife and I decided to go and do some Real Estate Investment courses to increase our knowledge and understanding of property investment.

In one of the courses the instructor said its very important to understand your risk profile. She picked me, and asked me if I could pick my risk profile out of the scale that she had provided us. 1 being low and 5 which was high risk. I quickly answered I'm a 6 then and some others in the group laughed. She quite seriously said why would I say this about myself? I said, "Well it's like this we have 32000 acres of dry land farming in the middle of NSW where 3 in 7 years are droughts and we crop 25000 Acres here.

We also have a further 5000 acres of irrigation farms in southern NSW. It cost two million dollars in input cost to get these farms to grow the crop. I have no control over the input cost (IE fertilizer and chemical prices go up and down every year). Little control over yield or the price we will get at the end of the day as grain prices can fluctuate from $150-$350 depending on world supply and demand. Plus I have $4,000,000 in doubt also! The instructor then agreed I was a 6 - an extremely high risk!

So we fast forward a year and I'm up in Moranbah looking for my first property investment. After comparing different properties I could invest in I decided to by three blocks of land and build 3 identical 4 bedroom 2 bathroom brick veneer homes with 6x6 meter sheds. My theory in doing this myself was on completion i would have some instant equity once valued. By using the same floor plans and using different front facades my builder gave me $20,000 discount per home.

I did this in the middle of the GFC and was told rent had collapsed and I would only get $800 per week. I was happy with that. Building cost fully completed 245 Sq mt homes fully landscaped was $355,000 plus land value of $119,000 = total cost of $474,000 each. Once completed and after council approval, build was 16 weeks. I rented them for 12 months to 3 separate listed companies for $1000 each - a bit better then I hoped as demand had lifted and a handy 10.9% return. Valuations on completion was $510,000 per home a $108,000 increase in equity for the 3!

The next year I rolled them all over to the same tenants for $1200 per week and valuations had increased to $650,000 per property - a nice little increase. Then things really started to go silly in Moranbah rent wise. At the time rents were around $2000-3000 and ended up even higher at up to $3500 for similar homes. With the other risk that I already had a home on the farm I wanted to minimize risk for the longer term, I was keen to try and lock in these high rents for the longer term and asked my property manager to investigate this further. They came back to me with the news that none wanted to lease longer than 12 months.

So I started to make my own investigations within the town as to which companies were looking for homes. I managed to get in contact with a major international company and negotiated to rent all three for 3 years at $2,350,00 per week each? I then sacked the property manager as the company has there own trades people that fix there rental properties. This was a savings of $600 per week. This new rent was a 26% return and $366,600 in rent per annum for the 3. On top of this the new 12 monthly valuations came in at $850,000 ($376,000 per house increase on cost or $1,128,000 for the 3).

Total rental per property since building at the end of these new 3 year leases will be $481,000 ( remembering that the total cost was $474,000). Even if valuations in this town have come off a bit now recent valuations would be more like $750k-$800k per house with this lease in place.

Hey, this is better than putting 2 million worth or seed and fertiliser in the ground and watching the weather channel for the next 8 months. Interesting to note that it takes my builder 12 weeks to build multiple townhouses in Moranbah, yet it takes me eight months to grow a wheat crop?

Until next time...

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A few years back, farmer Paul Brooks was discovering that a decade of drought had dried out much more than his family’s crops. His savings was drying up as well, but since turning his attention and passion to property investing, he has built a $10m portfolio and developed a sophisticated investment philosophy that earned him an honourable mention in the 2012 YIP Investor of the Year Awards. 

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  • property management says on 23/01/2013 05:55:32 AM

    very good & imformative article it is.......

  • Bala Apparao says on 06/11/2013 06:31:08 PM

    Hi, I agree with your words thanks sharing such informative content. Property investment is very great source of income to become rich but before investing we have to take care of some important factors like - cash flow analysis,negative gearing etc.

  • Bee says on 16/12/2013 12:44:35 PM

    Really interesting read....but what advice would you give investors in Moranbah now-2013? We have only recently settled on a property (I would have pulled out of the deal in april but unfortunately the cogs were already churning!). Our only option is to hold for the time being, but what does your 'crystal ball' tell u in regard to growth in the area, where do u think it's gonna go and how long will we need to sit tight?

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