High Yield Opportunities in Affordable Housing

By

06/08/2018

 

The ‘Small is the New Big’ formula called HI RES, teaches investors how to turn a healthy profit by investing in one of the most overlooked segments of the market.  

We talk to Ian Ugarte about how he sees this sector and how he is helping others develop highly profitable portfolios.

In the 15 minute interview we cover:

    * How Ian started investing in property
    * How he manages to do it full time
    * Why we have an affordability issue in this country
    * What is an upside down market place?
    * The fastest growing demographic of homelessness in Australia and why
    * Are high yields and affordable housing a contradiction?
    * What the HI RES system is all about and how to get started

Here is a link to the report on High Yield Opportunities in Affordable Housing mentioned in the interview:

Transcript

Kevin Turner:    Hi, Kevin Turner from Real Estate Talk, good to be with you on this special interview. On behalf of Your Investment Property joining me, Sarah Megginson from Your Investment Property. G'day Sarah, how you doing?

Sarah Megginson:    G'day Kev, I'm great.

Kevin Turner:    And in this interview we're gonna be talking to a very successful property investor himself, about his product called HI-RES, which is part of Small Is The New Big. I'm talking about Ian Ugarte. Ian, welcome to the broadcast.

Ian Ugarte:    Thank you. Thank you for having me.

Kevin Turner:    We spoke a little bit off air and we want to touch on that, but if we could start with how you can get a healthy profit from investing in one of the most overlooked segments of the market. What is that Ian?

Ian Ugarte:    Well, what we've got is a marketplace that has not really got the possibility to meet the need. So we've got what we call a “market mismatch”.  At the moment 80% of the people that are looking for a rental accommodation are either singles or couples, and 80% of our marketplace are three, four and five bedroom houses. So, we've got an opportunity to create smaller spaces in our larger houses to be able to use different strategies and policies across the country to meet a market need.

Kevin Turner:    Well we're going to talk about a great strategy in just a moment. One that we spoke about off air. But before we do that, Sarah and I would just love to ask you how you first started investing.

Ian Ugarte:    Look, I first started investing more than 20 years ago and have just followed my father. Went down the negative gearing trap, got myself to a position where I absolutely loved my teaching job in Toukley New South Wales, had a decent sized portfolio, and walked into work one day with new boss, completely tore my world apart within two days, and I couldn't afford to leave because I had $36,000 bill every year that I had to pay. And so, I wanted to get out of work as quickly as possible. So, what I did was, got myself educated, which is the thing that I didn't do, and within 13 months using the strategies we're gonna talk about today, I got out of paid employment.

Ian Ugarte:     Now, my early days I actually just did standard every day developments, and became a full time developer. And, I woke up in 2013 with money in the bank account, and probably the hollowest day of my life, with no meaning and no existence, and I thought the money was gonna make me happy, and it didn't at all.

Sarah Megginson:    Wow, that's so interesting. And, we've touched on your story in the magazine before, but what you were talking about with your job, the whole idea of investing in property is meant to create that freedom for you to be able to make choices, and that happens sometimes, where a portfolio's actually boxed us in. It's happening more and more for people at the moment with lending criteria changing and making it really hard to make those choices. So,  obviously this new strategy you've got is opening up a lot more choices for people.

Ian Ugarte:    Yeah, I mean, I had to have a really good look at myself while I was doing what I was doing, and for 39 years of my life I chased money.  I thought it was gonna make me happy, and it didn't make me happy. And so, I then started looking at what could I do to actually have an outcome that benefits myself and benefits others at the same time.

Ian Ugarte:    So, we've got a saying in Small Is The New Big, which is our umbrella company, that it needs to make sense before it makes dollars. So, it needs to effect the community in a positive way first, and then secondly it needs to make us money. If it doesn't do either one of those, then we don't do the project, 'cause I can sit at home and go broke, but I don't have to do property “deals” to do it.

Kevin Turner:    Can we talk about affordability from a moment, I want to ask you a two-pronged question. One, do we have an affordability problem in Australia, and if we do, why is that so?

Ian Ugarte:    We've got a huge affordability issue in this country, and the reason is because Australia builds the largest houses in the world at 246 square meters, and each one of those houses is two and a half people. We have 12 million empty bedrooms, and we've got people that just cannot afford to rent. So, right now I'm sitting in this beautiful, lovely, wood-paneled property, which is actually one of our properties that we had purchased, and this in Tasmania.

Ian Ugarte:    So, currently right now in Hobart, we've got people living on the show grounds at $180 a week, sharing showers and getting up in freezing conditions, and not because they can't afford to live somewhere, they've got their furniture in storage, it’s that there’s no stock. So, when you've got this market mismatch, you've got nowhere to rent at a reasonable rate. And add to that, we've got the advent of the short stay market, which has taken long term rentals off the property market, and that means that people are suffering more, and more, and more.

Sarah Megginson:    And when you talk about those people Ian, what are the types of demographics? Who are these people that are finding it hard to get accommodation?

Ian Ugarte:    When we talk the affordable housing market, most people automatically go to the low socioeconomic arm, and that may have been the case 20 or 30 years ago, but what we've got now is the largest growing demographic of homelessness in the country right now is the 55 plus single female. So, that's the woman that was told 20 or 30 years ago, find a guy with a good job, you'll be all right for life, they have kids, they don't have a career, their career is actually looking after a family, finances, the whole lot. They get to the point where their kids go to university, they have a split up with the husband, they get a really crappy financial settlement, and then they end up finding out how hard it is to actually find accommodation. They've got no super to their name, and then they end up sleeping cars, and sleeping rough.

Ian Ugarte:    So, we don't know what the face of homelessness looks like anymore, because, you could be walking down the street, and there's a beautifully, immaculately dressed and groomed person, that is actually living in a car, and we don't know that exists.

Sarah Megginson:    Wow.

Kevin Turner:    It's obviously a big, big problem. And, the thing I love about what you do, Ian, is that you're using that problem as a leverage to help you grow and help the community too, which I think is fabulous. Can we talk, for just a moment, about one of the developments in particular, let's talk about that beautiful abode that you're in right now, which is one of your recent purchases in Tasmania. But, there's an interesting side story, this isn't there. Tell me about what you're doing there.

Ian Ugarte:    Well, I mean, we went out looking for particular properties that would give me much more, and this particular property here is actually an old sports center, it has squash courts in it, and squash courts are a dying trait. And, with what we do, we create micro apartments within one dwelling.

Ian Ugarte:    So, we build somewhere between 22 to 35 square meters, they have their own kitchen area, they have their own bathroom area... So, they're studio apartments. So, because squash courts are built of besser block, and they're quite high, in one squash court, we can put four separate micro apartments. So, we've got six squash courts here, that's 24 micro apartments with one communal area that they share, and they have a laundry as well that they all share. And, these rent for $200 to $250.

Ian Ugarte:    Now, that's a third to one half of the nearest rent that any couple in this area can afford. So, they're actually getting some money for savings, so that they can save up money so that they can get into their own property as well. So, no one loses out of what we do, because the investor makes a great return. We're talking about double digit returns when we're talking to investors, we're talking about the people that live in the property that save $150 to $200 a week. Within three to four years they can afford to buy their own property.

Ian Ugarte:    We're actually taking pressure off the bottom of the market, and those 55 plus single females are our greatest tenants, they look after the places, they become the adoptive mother in the area, they always clean up, they always make sure that things are OK... We initially should be paying them to live in our properties. But, they're just so happy because they can be independent and they’re not forced to give up their rental accommodation just so they can continue to go to restaurants, and get their hair done, and buy nice clothes, because they rightfully should be able to continue to do everything.

Sarah Megginson:    So, when you talk about that communal area, it sounds like your creating little community hubs. So, they have their own studio apartments, but then there's also a kind of, is it like a living room, barbecue area where people can get together?

Ian Ugarte:    Yeah, that's absolutely correct. I mean, there's policies across the whole country, and people just don't use them, and we started to use them. So, those communal areas create genuine connection within community, and what we're doing is just providing a different diversification of housing.

Ian Ugarte:    So, instead of having a whole bunch of four bedroom houses, every now and then we've got a rooming house, or what we use, communal residence. We're not talking about the 1970's boarding house, we're talking about a modern day, over-sized hotel room with these communal areas where people can interact, and if they don't want to interact, they simply go to their own space, they use their own bathroom, and they use their own kitchenette. It's really quite simple.

Sarah Megginson:    As an extra, I was just going to say, one thing I love about this is that, for that older demographic you're talking about, there's a real safety element there too. Because if you're on your own, and you've got this community around you, that's an extra safety check if things go wrong.  There's so many benefits to these types of things.

Ian Ugarte:    Yeah, absolutely, and the safety aspect of that is we're big about mixing demographics. Over the last 30-40 years, it was all about “let's put the 55 year old's over there, let's put the students over there, let's put the workers over there”. We actually mix our demographic, they interact really well, they understand how each other ticks, and like you just said, they look after each other. We've got one client that’s built rooming homes with us, she's got eight in one area. And she's now got the single mother, the grandmother, the guy that helps out changing light bulbs etc. She's created a real genuine community within one plot of land, it's so amazing when that happens.

Sarah Megginson:    I love it.

Kevin Turner:    Ian, this style of construction, this style of living you're talking about, is there an ideal location for it? Or does it work almost anywhere?

Ian Ugarte:    It does work everywhere. So, the way I normally explain it is that in regional areas, you will get really great cash flow, and you'll have the standard long-term growth that happens in regional. If you want little spikes, and you want to hold in metro areas, you'll get slightly less cash flow, but you're sitting on properties that go up very quickly over a short period of time.

Ian Ugarte:    If you owned in Sydney, using the policies that we talk about, in 2012 you would've had a return on your investment, and it would've doubled within three to four years. So, depending on whether you want to go regional ... I love the regional aspect of it, you get great residents living in the property, they stay there for a long time, and we're talking 6-12 month leases, we're not talking short stay of two or three weeks, they're here for a long time.  On the other hand, with the metropolitan area, you've got the safety and security of a really great investment, giving you a great grossing yield return of nearly, sometimes above, 10%. And at the same time, getting the capital growth that happens in those cities.

Sarah Megginson:    That's fantastic, it's a real win, win, win. I love it.

Kevin Turner:    It's turned everything around, hasn't it? I mean, we cut-off and thought it would be impossible to get high yield and housing affordability. If you're in an affordable area, it's going to be low income, but you really turned that around Ian.

Ian Ugarte:    And that's really great point that you bring up, Kevin, because when we talk about housing affordability, people automatically think, oh well we're talking about lower socio-suburbs. Housing affordability is actually, by federal definition, saying spend no more than 30% of your gross wage, and you are living affordably. Now, as an example, in metropolitan Melbourne, in the median house price in October of last year, for rental of a four bedroom was $420, and for a two bedroom was $415. So, there's only five dollars difference and a house that's probably 100 square meters less.

Ian Ugarte:    Now, 96% of people in metropolitan Melbourne are living under housing stress. So, whether you want to be in Toorak, or Double Bay, or top of Perth, close to the city in Adelaide, affordability depends on where you desire to live, rather than how much you earn. With regards to affordability, if I spoke about Sydney, in an area where you'd rent a house for $2,000 a week, affordability is $600 a week. In a place where you rent a house for $700 a week, affordability is probably about $350 a week. So, it changes depending on where you desire to live.

Kevin Turner:    I think it'll be handy now just to talk a little bit about HI-RES itself, how did the system start? Tell us a little bit about it, Ian.

Ian Ugarte:    So, the High Income Real Estate System was put together for a number of different reasons. Firstly, I saw people going out and putting multiple people into households that were putting the residents in danger.  So, that would mean that if an accident happened, or there was a fire, or worse-case scenario, someone passed away, which has happened in other states, like Victoria, then we would be in a position where the owner of that property is not insured. There's no extra protection that'll save them, and they’d face possible jail time.

Ian Ugarte:    So, in some states there's two years jail time, and up to $200,000 worth of fines if you don't do this correctly. So, I noticed people, investors going out there and putting themselves at risk, and so I thought I need to step in. Now, as being a full time developer, and builder, and a plumber, it took me two years to get the HI-RES system together.  Now I teach other people how to do the same thing.

Ian Ugarte:    Now, then the community aspect came about from the saying, "We're one million self-contained homes short in the next 10 years."  So, I could go out and create 24 of these, constantly over and over again, but I still would not hit the target of a million. So, other people need to fix this marketplace by coming in and saying, "Okay, well I'm going to do well. I'm going to do a great investment, I'm going to be able to fix the marketplace, and at the same time, I'm going to be helping community, and getting great aspects out of that."

Ian Ugarte:    And so lastly, the reason that HI-RES was established was because being a community and people focused person, I want to make sure that I pass on every skill that I have.  From waking up in 2013 suicidal, having the hollowest day of my life, and I'm so grateful that that day happened, because I wouldn't be here being able to talk to you about this, and I would never have had that change that affected me in such a positive way.

Kevin Turner:    Thank you for sharing that, Ian.

Sarah Megginson:    Think of the amazing ripple effect that this is going have on so many people in so many communities, it’s incredible.

Kevin Turner:    Well, if you're driven to find out a little bit more about this, and we thoroughly recommend that you do, Ian, just give us a contact point where people can reach out to you.

Ian Ugarte:    Sure, you go to smallisthenewbig.com.au. You can download a free 35 page report on all of the policies across the country, so you get an understanding of what we do, and then from there we can start talking.

Kevin Turner:    Ian, it's great talking to you mate, thank you very much for sharing.

Ian Ugarte:    Thank you. Thank you for having me.

Kevin Turner:    And Sarah, as always, it's a delight talking to you, thank you.

Sarah Megginson:    Thanks.

To find out more, download your free report on High Yield Opportunities in Affordable Housing.

 

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