Twelve years ago, Garry Harvey was a 26-year-old Victorian, looking to buy his first home. Now, at the ripe old age of 38, he has amassed a portfolio of 35 properties, spread across seven states, which return over $500,000 a year in rental income and have given him $2.75m in equity to work with. To achieve results like these, you need business acumen, an eye for value and opportunity, plenty of lessons learned along the way, and a solid education. Like most of the best investors, Garry has all these qualities, held together by his commitment to building a self-sufficient portfolio.
“My overall property strategy has been right from the outset to build a portfolio that will support itself without requiring the need for tax dollars or financial input from me personally,” Garry explains.
“I have always seen my role as a property investor to be the manager of the assets while they grow in value, and I really wanted to create something that wasn’t a financial drain on me month-after-month.”
Of course, the naysayers intervened, but Garry wasn’t about to be deterred.
“Many people told me this wasn’t possible, but my determination to succeed drove me to keep finding solutions to the cash flow issues that kept presenting. My attitude was that every problem I faced was just another opportunity to find a solution.”
A brilliant start
The nature of Garry’s (whose picture appears on the left) first ever purchase offers great insight into the type of investor he would become. While checking out the market in the early stages of 2000, he came across a duplex for sale at Hurstbridge, 26km to the north-east of the Melbourne CBD. He snapped it up for $187,000, attracted by its multiple positives.
“I was able to live in one home and rent the other one out, so we bought our first home and investment property all at once,” Garry says.
“It was a good property to start with because it provided an income, and it also had sub-division potential and some other value-add potential.”
Down the track, Garry would subdivide the property, put it on two titles and sell the half that he originally lived in, but in the early stages, that duplex provided him the equity and return needed to kick-start his portfolio.
Living in his Hurstbridge property in 2001, Garry took note of the growing equity in his property and decided that if he wanted to become a serious investor, he would need to be educated.
“I did a property course, which turned out to be probably the single most beneficial thing I’ve done,” Garry says. “It opened my eyes to how it all works; all the different strategies, how to structure your finance and so on.”
Garry decided that due to the fact he had limited capital and a modest income, he needed to invest in properties with good rental returns if he was going to be able to stump up the sort of money required to build his portfolio.
While researching potential areas to invest in, he looked first at yield and then refined his prospects using other value indicators.
“Once I had found an area with suitable returns, I would then look at things like vacancy rates, capital growth rates, the industries in the area and the future outlook for the suburb or town,” Garry says. “In rural towns, if companies like McDonald's and other fast food chains, department stores and hardware stores had set up shop, that gave me confidence that the area had a future.”
Once he was happy with a suburb or town, he would examine it on a micro level, seeking properties with good appeal and functionality, in sought-after locations, in a price range that had rental demand and in favour with local agents.
Adding growth to yield
After being told numerous times that investing in properties with high rental returns would mean sacrificing capital growth, Garry took measures to give himself a shot at the best of both worlds. “I looked for areas that I believed were entering a growth phase. If property prices had been flat for a number of years, then that was a useful signal that the next growth phase wasn’t far away,” he says.
“In late 2004, I began investing in mining towns around the country because I truly believed the sector would be strong for decades to come. This is still a view I hold today and I select areas with real solid mineral reserves and multiple mines where possible. I have taken some risks in investing in smaller mining towns, which have produced mixed results, but I am confident of the long-term outlook in all the towns I have invested in.”
Garry’s diligence paid off and his strong rental yields have been complemented with excellent capital growth figures.
“On all the properties I purchased between 2000 and 2010 and still hold, my average percentage increase on the purchase price has been 57%,” he says. Another deal that brought a windfall for Garry was a renovation he completed in 2009. Preserving the capital has always been a high priority of his and he makes a huge effort to use what he has as effectively as possible.
An opportunity came up to buy a house in the western suburbs of Melbourne that was partly renovated but not complete to live in. “A property in this condition is a lot harder to obtain finance for and was also going to need around $40,000 to complete the project,” Garry recalls. “I was able to buy the property for $160,000 but I had the purchase contract drawn up for $208,000 with a five-month settlement. In that contract the vendor was to make an allowance at settlement in my favour of $48,000 to cover stamp duty and renovation costs. What this enabled me to do was use my capital to complete the renovation in five months, which meant that when I applied for my finance, I now had a completed home that was valued up to the higher contract price.”
Gary took a 95% loan plus capitalised LMI, which meant his loan to purchase this property came to $201,500 and he was able to reimburse all the funds he used to complete the renovation, and that capital was then available to be used for future purchases. “All up, once this property was settled and I had been reimbursed, I had used less than $10,000 of my own funds/equity to acquire it, and I used a vendor finance strategy which provided me with $390 per week,” he says.
Staying one up on lenders
The million question for a lot of investors looking to emulate Garry's achievements would be “how do you convince the banks to lend you money for 35 properties?”
For Garry, numerous factors helped him acquire his properties, including learning a thing or two from experience. He breaks his strategy down into three distinct aspects.
1. High yields
During Garry’s acquisition stage he placed high emphasis on rental return, meaning the additional income helped with serviceability. Typically, he aimed to buy in the 8% or more yield bracket.
2. Studying the lenders
Garry spent time getting to know the policies of different lenders, which he says vary greatly, particularly in how they assess your ongoing commitments with other financial institutions. “If I’ve got a mortgage for $100,000 and the payments are interest-only, some banks will use the actual repayment when they test my capacity to service, while others will add a sensitivity margin to that and assess it on principal and interest,” Garry says. “That really hurts my borrowing capacity, so selecting the right lenders is very important.”
3. Splitting ownership structures
Garry believes the most critical aspect of continuous borrowing is to split ownership structures and ensure loan applications are not held back by other debts. “My properties are owned in four different structures,” Garry says.
“My wife owns two in her name; I have a family trust set up where I’m sole director of the company; I have another family trust where my wife is the only director of the company; and we have a company set up where I own half the shares, but my father is the sole director.”
This tactic ensures that each structure has buying capacity in its own right; the debts of company one don’t have to be disclosed by company two when it applies for finance.
“A lot of people make the mistake of wanting husband and wife to both be directors of every company, but all that does is inhibit borrowing capacity,” Garry says. “I found this out when I originally set up with my father. At first we were both directors and bought a couple of properties, but we got knocked back while trying to get finance for more, because I had other debts from other companies and it knocked us out on borrowing capacity.”
Garry currently has loans with 10 lenders, after consolidating a number of others with Westpac, his preferred bank. He favours the major banks, which he finds to be more competitive for pricing and flexibility and also safer.
“What happened to smaller lenders during the GFC really put me off,” he says. “The structure of them and the way they accessed their funds meant that when the cost of funds went up, they got hit the hardest.”
The investor becomes the lender
A number of the properties in Garry’s portfolio have been purchased under a lending strategy he employs to boost cash flow, which involves vendor financing. The way it works is that he buys a property and on-sells it to someone who does not qualify for conventional bank finance; perhaps due to bad credit or a lack of deposit.
“The title is in my name, and I on-sell it using a vendor terms contract,” Garry says. “The term of that would be 30 years and I’d put a small capital profit on it. So, for a $200,000 house, with costs adding up to $220,000, I might sell it for $240,000. Then I charge an interest rate of 1.5–2% above a bank’s standard variable rate, which is probably more competitive than other non-conforming lenders like Liberty or Pepper.” This strategy enables Garry to create extra cash flow and capitalise on a small gap in the lending market. He also takes measures to mitigate the risks involved.
“First, I take a deposit from them, so they have money in the deal–typically this amount is between $10,000 and $30,000. The title remains in my name up until the final payment, so I have the mortgage and am obligated to meet the repayments. If the clients have issues paying, I just move them on and do something else; another vendor terms contract, or I’ll just convert it to a normal rental.”
Garry’s clients are entitled to any equity above whatever balance they owe him, so if they decide to withdraw from a deal, he either sells the property and pays them their share, or he keeps it and buys their portion of the equity off them.
Having been a mortgage broker for the last six years, Garry took out a credit licence, which allows him to use this strategy and comply with the new lending requirements recently introduced.
“I have six of these at the moment and they have played a massive role in the success of my overall portfolio,” says Garry.
“Heading into the GFC, when rates were rising and there was cost pressure on what I was doing, we had about 10 of these going at the time and some were cash flow positive to the tune of around $1,000 a month.”