Peter Younghusband has done extremely well for himself. He owns two properties outright, has a 50% share in six others and is sitting on a personal equity pot of just under $1.4m. It’s a portfolio that has allowed him to semi-retire – and he’s only 43.
It all started out simply enough. Peter arrived from the UK in 1997 to work in Karratha, in north-west WA, as a teacher. After a couple of years he came into an inheritance and decided to spend the money on an Australian property. With no pressing need for a property of his own, he decided to go down the investment route.
“I was keen to buy a property, but I didn’t need one in Karratha because I was working there as a teacher and my housing was covered by a government scheme,” he explains. “So I needed to buy an investment property.”
Being in WA, his first thought was to invest in Perth, but he didn’t feel comfortable buying a property 1,500km away. An off-the-cuff staffroom chat with a colleague, however, brought his attention to the Defence Housing Australia (DHA) scheme – something that he thought could be the hassle-free solution to his dilemma.
“I did the research, contacted Defence Housing, said I was interested in buying a property and asked how I went about it,” says Peter.
Time to buy
Peter was left with the task of doing his due diligence on the suburbs and properties that were on offer from DHA at the time, and enlisted the help of a friend from Perth to garner some local knowledge on where to buy.
“I came down for the weekend while my mate from Karratha was also down for the weekend. We met with one of the reps from Defence Housing and went round to look at three or four different properties in different suburbs. And it was my mate who said he thought this suburb – Gwelup – was going to do well for me,” says Peter.
“Gwelup is north of the river, he came from north of the river and had a good understanding of the property market. He thought that being right on the freeway, and 10 minutes from the city would make it a good place to buy.”
And it was. Peter bought a four-bedroom, two-bathroom house in Gwelup (around 10km north-west of the Perth CBD) for $270,000 in July 2001, which was just $5,000 lower that 2001’s median price of $275,000 according to PDS. It’s since grown in value by a massive $430,000 to reach $700,000, which represents an average annual growth rate of 10%.
Peter timed his purchase extremely well, hitting the Perth market just as it was heating up for the resources boom. This allowed him to sit on the property, have it rented out to defence personnel and use its increased equity to pick up property number two 18 months later – this time in Atwell, around 20km south of the Perth CBD.
And, while the Gwelup property was negatively geared, Peter notes that he was happy enough to take the cash-flow hit, make the most of the tax benefits and watch his property go through its capital growth spurt.
“Because it made a lot of capital growth in a short space of time, I was able to borrow the deposit for the place in Atwell from the property in Gwelup, and was able to do the same thing again. This meant that the positive effect that it had on my tax return was then doubled,” he says.
A new strategy
Peter decided to stick with DHA, but this time to try a new strategy and build a house to their specifications rather than buying one of the houses that they already had on offer.
He set his sights on Port Kennedy, around 50km south of Perth and 10km south of Rockingham, as it was an area that he knew DHA were keen to find more accommodation in and had hit the headlines recently as an up and coming hotspot.
“I’d been reading a lot about Port Kennedy, and it had been featured a lot in the magazine shows like Today Tonight. They often have features on where the best suburbs are and what’s going to do well. It was also mentioned in the local papers, and was in amongst the top 10 or 15 recommended suburbs that were going to do well over the next five years,” says Peter.
He adds however that, for him, the underlying factor in his suburb selection was the need for Defence housing, while Port Kennedy’s much-heralded investment prospects obviously positively influenced his decision to head there next.
When it came to the building process neither Peter nor Greg had overseen the construction of a house from scratch before. So, to simplify the project, he approached DHA and sounded them out on what was required.
“I told them that I was going to build a property, and that I was happy to build it to their specifications. I said, ‘tell me what those are, I’ll give those to the builder, and I’ll tell him that’s what we’ll build’. And pretty much that’s what happened.”
Bumps along the way
But this third property investing experience wasn’t all plain sailing. DHA had set a 1 June deadline by which time they had to sign the leases on any private properties in Port Kennedy that they were going to let to defence personnel, and Peter had a handful of last-minute mishaps that could have seen the project run over and miss this crucial date.
“There were a few things towards completion that we had to work out for ourselves. I found out not long before completion that we’d have to get it painted ourselves. And we had to construct a covered patio area out the back,” he says.
“We got under the pump a little bit because these extra jobs that we had to do obviously were going to take an additional amount of time.”
While these relatively minor setbacks were manageable within the timeframe that Peter and Greg had left themselves, their project was dealt yet another blow just as the finish line was in sight.
“About a week before the deadline we had a break in and they took the stove. Well, of course, Defence won’t sign off if there’s no stove,” says Peter.
“So little things like that made it hard work towards the end, but overall the experience was not a bad one. It just got a bit panicked towards the end.”
Peter admits that they didn’t have a back-up plan as such, but he doesn’t believe that finding private tenants would have been too much of an issue if they’d missed the DHA deadline. In fact, another friend of his had built a very similar house on the block next door and had managed to rent it out without any dramas.
All up, Peter and Greg spent $340,000 on the four-bedroom, two-bathroom Port Kennedy house, and the property’s now valued at $450,000. This represents capital growth of $110,000 in just over six years.
The average annual capital growth rate on this property therefore comes in at 4.5%, and if you take a look at the growth chart for Port Kennedy’s median prices it can be seen that Peter and Greg hit a patch of negative to flat growth in the area not long after building the property in 2005.
With this stint of property development under his belt, Peter decided to stay closer to home with his next purchase and invest in the booming Karratha property market. Karratha is notorious for its shortage of property, despite the big demand for accommodation from resource sector workers.
This this time around Peter and Greg were unable to find an available DHA property, so decided to snap up a one-bedroom unit to rent out to private tenants.
This property was bought for $208,000 back in October 2005, and has performed exceptionally well since. Its current value of $375,000 represents an average annual growth rate of just under 11% since purchase.
“Buying there a few years before would have been even better, but growth in Karratha has just continued for the last 10 years really,” says Peter.
“It really looked after itself, because I was living and working there between 1997 and 2004, so I knew what was going on there. It was a case of buying whatever we could.”
The yield too has been exceptional. Peter notes that the property was already returning $330 a week when they picked it up, which was already a gross rental yield of 8.25%, but with the property now renting for $700 per week, the yield has jumped to an incredible 17.5% thanks to the region’s resource-fuelled weekly rents.
“The majority of the rentals there aren’t private rentals; they’re looked after by the company – who then put in their workers on a subsidised rent. The security’s better for you because, a bit like Defence, you’re renting to the company not the individual.”
Time to diversify
With the Karratha unit secured, Peter and Greg decided that it was time to branch out of WA to diversify their portfolio and avoid putting “all of their eggs in one basket” as he puts it. And with their available equity they were able to snap up properties in Townsville and Darwin in quick succession.
In Townsville they went for a four-bedroom, two-bathroom DHA house in the suburb of Mount Louisa. On seeing this property on the DHA website, Peter had in fact tried to persuade a friend to pick it up as their first step into the property investment game.
After all, this was the very same friend that had persuaded Peter to go for his first investment in Gwelup, so he thought it only fair to return the favour.
His friend wasn’t ready to make the transition to property investor however, so Peter decided to “snaffle it up” himself.
“My investing partner Greg was born in Townsville, so he had an idea of the potential there. And we were comfortable to expand our horizons to other cities and states, so we jumped on it,” he explains.
“He lives and works in Brisbane, but is still very well connected in Townsville. And there were reports in the press at the time that suggested that Townsville had the biggest growing Shire in Australia for population growth, so that was definitely a factor – as well as Greg’s personal knowledge.”
The pair bought the four-bedroom, two-bathroom property for $405,000 in January 2006 which, unfortunately for them, was just before the area’s capital growth rates started to flatten out.
The property has however seen some moderate growth since purchase, and is now valued at $420,000. And with Townsville now being one of the nation’s most talked about hotspots (it reached number 19 in Your Investment Property’s Top 100 Suburbs list this year), Peter and Greg will have high hopes that their property will start to pick up its game over the next few years.
The Top End
Their Darwin property however has fared better. Also purchases in January 2006, this two-bedroom unit (Peter’s fifth DHA purchase) has increased in value by $80,000 over the years, rising from a purchase price of $340,000 to its current valuation of $420,000.
“Darwin we looked into and thought that it was a promising area,” says Peter. “Rents and property seemed to be on the way up, so it seemed like a good place to go. And the property that was available ticked all the right boxes in terms of price, rental return and prospects for capital growth.”
He adds that, at the time, Darwin was increasing in population and there were constant demands on rent, so there was certainly the potential for the rent on their Darwin unit to increase further – especially as it was centrally-located in the CBD.
While the pair did miss the boat slightly with Darwin’s 21st Century growth spurt (their property has achieved an average annual capital growth rate of just under 4%), their Top End unit achieves a more than respectable gross rental yield of 7.34%, which should more than tide them over until the volatile Darwin market hits its next spike.
Back to WA
Having now bought four properties as joint venture partners in less than two years (bringing Peter’s tally to seven), the pair decided to sit back for a while and didn’t make another purchase until just over a year later – when they spotted an offer that they couldn’t refuse.
Peter had kept his eye on the Karratha market since the unit purchase back in October 2005, and was pretty desperate to expand his portfolio within this highly lucrative market. So, when a DHA property finally came up for sale within this super tight market, Peter and Greg jumped at the opportunity to snap up this four-bedroom, two-bathroom house in the resource industry’s Pilbara heartland.
“By this point I’d been in the game for about five or six years. I was very comfortable with property investing, very comfortable with Defence, and very comfortable with Karratha. And having now experienced owning a unit in Karratha that was doing really well, it reinforced our opinions that Karratha was an absolute goldmine.” says Peter
“Of course the doomsayers were saying from the day that I got to Karratha that’s it’s alright while things are good, but one day there’ll be a crash. But by now I was certain that if there ever was going to be a crash it would be a long time away, so was desperate to get hold of a defence property in Karratha.”
During his time in Karratha, Peter had noticed that the local news agenda was dominated by the booming resources sector, and he couldn’t help but notice that mining giants Rio Tinto and Woodside were going gangbusters.
“It was on the news every week that Woodside couldn’t get gas out of the ground quickly enough to sell it. They built a fourth gas train [the liquefaction and purification facility in a liquefied natural gas (LNG) plant] in the early 2000s, and then not long after starting train four they announced they were going to build train five. And they signed a deal with China to buy their gas for the next 25 years,” he says.
“And it was the same with Hamersley Iron [owned by Rio Tinto]; they couldn’t get the iron out of the ground fast enough.”
He also knew that the scarcity of available land for development in the Karratha region meant that, in simple supply and demand terms, property in the town was like gold dust.
So in February 2007 Peter and Greg managed to take their second slice of the Karratha market in the form of a $630,000 four-bedroom, two bathroom house with DHA. The property has since grown in value by $220,000 (an average annual growth rate of just under 7%), and now brings in an incredible gross rental yield of 14.86%.
But the yield wouldn’t be quite so impressive if Peter hadn’t exercised his right to challenge the rent increase that DHA had settled on several years earlier. He explains that DHA’s rent reviews are supposed to take into account the area’s market conditions to make sure that DHA investors wouldn’t have been better off buying a property and renting it out on the open market.
“Going back two or three years, the defence review came back and they were putting it up to $1,000 a week, from $900 and something. I did some research and found out that was ridiculous, and exercised the option to get my own review done,” he says.
“I sent a Perth valuer up to Karratha at my expense to go and do a rental valuation. He came back and said he thought it was worth $1,500 a week. So I sent that off to Defence and they said ‘no dramas, we’ll pay you $1,500 a week’”.
He estimates that the whole process cost him $1,000, which was recouped within two weeks thanks to the upgraded rent.
“The rents are supposed to be market value. I do my own research for all the reviews to make sure that I’m happy, and I’ve never had a problem with any of the other ones,” he says. “Karratha is a bit of an exception, because things are so wild up there.”
The Karratha house was Peter’s most recent foray into Defence accommodation, with his final purchase (once again with Greg) being a hotel room in Hobart, of all things. Peter admits that they did get their fingers burnt slightly with this one.
As he explains buying the hotel room has somewhat hampered his ability to expand his portfolio further.
“We were struggling with deadlines, and had to go through with it, so we just used cash from our lines of credit with a view to getting an actual mortgage for it,” he explains.
“And it was only after that that we found out we couldn’t get a mortgage because of the size of it. So since then it’s been our lines of credit that hold that property, rather than having a mortgage on it.”
So Peter found out the hard way that, when it comes to getting a mortgage, lenders have a minimum floor plan size below which they won’t be willing to lend money on a property.
Branching out into the world of hotel accommodation hasn’t been a complete disaster for Peter and Greg however: their rent is guaranteed for five years, including an indexed annual increase; the lease is renewable every five years; the vendor covered all settlement costs; there are no maintenance or management costs; and the property currently yields a respectable 7.63%.
This rental income covers the interest repayments on their lines of credit, making this a neutrally-geared investment, but Peter admits that – despite not losing any money on this particular investment – he would prefer to be able to put his lines of credit towards more profitable investments.
“We were given some bad mortgage advice. It wasn’t my usual broker who did this application, it was someone else at the company. We were told to use our lines of credit, which they would replace with a mortgage. So we did get a bit burnt, but nothing serious.”
He adds that – if they could get back the $150,000 that they paid for the room – selling up and pumping the money into another place in Karratha would be the way forward.
“But at the moment there’s no market in Tassie for selling,” he says. “If we could get out what we put into it we’d probably sell it.”
All up however, Peter’s quite satisfied with his lot. His successes with property investment allowed him to move to Perth at the beginning of 2005, where he now lives happily with his partner Karen.
He’s also been able to cut back his hours, and now only has to do casual teaching to pay the bills, although he hasn’t really thought about giving up the day job altogether yet.
“How that would happen I’m not sure yet,” he says. “Whether I’d sell one or two properties, reduce the debt and generate more income or just continue the way they are, I haven’t looked that far yet,” he says.
“But all of the loans are interest only, so there’s no capital repayment happening anywhere. I’m 43 now, so I guess I’d look in seven or eight years at whether to sell something or not.”
In the meantime, with a $1m-plus equity base and a weekly rental income of more than $3,000, he’s quite happy to stick with the casual teaching as he works out how to make the transition into full-time retirement.