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236: The Politics of Property Investing - Scott O’Neill
84 Plays3 months ago
Property investing has become both a political hot-button topic in Australia where we have some of the world’s most expensive housing in our capital cities as well as a great way for “mum and dad” investors to build wealth. Safe as houses as the saying goes. Then there are the types – in short residential and then commercial property investing. So that is our podcast topic today. Meet Scott O'Neill, the Managing Director of Rethink Investing, has had a shift from civil engineering to property investment. Achieving financial independence by the age of 28 with a commercial and residential portfolio valued at $80 million AUD, Scott's dedication to mastering the nuances of the real estate market has propelled him to the forefront of the industry. Scott's dedication to empowering investors, whether new or experienced, towards financial freedom is exemplified through his contribution to the top commercial property podcast "Rethink Investing’s Inside Commercial Property Australia," his co-authored book "Rethink Property Investing," and the educational platform Rethink Commercial Education. He cultivates a culture of learning and growth, aiding Australians in their pursuit of financial independence and freedom by sharing his expertise.
Scott shares his views on:
1. Tell us how property investing has changed in the past decade, and what that means for commercial investors and other property.
2. Is commercial property investing vastly different from residential investing (beyond the stock type)? How?
3. Is being a high-net-worth individual mandatory to get a stake in those commercial types of property investing?
4. Since 2015, your firm has assisted more than 3,750 clients in acquiring over $4.25 billion worth of real estate, strategically focusing on positively geared, high cash-flow investment properties. Share your ethical and strategic approach or business edge.
5. What are the biggest 1-3 mistakes investors make and are these more than just market-related shifts such as the trendy locations being always “hot” or shiny new business parks opening up?
6. Favourite business tool (not a smartphone) and what can it do for you that helps?
7. Takeaway: What is your final message for us on The Politics of Property Investing?
Connect further:
Rethink Investing | Commercial Property Buyer's Agency Australia
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Transcript
Introduction to the Podcast and Host
00:00:02
Speaker
Welcome to the politics of everything. I'm Amber Danes, your host and podcast producer. This is a half hour of power podcast dropping every week where I unpack the politics of everything from money to motherhood, nutrition to narcissism, startups to secularism, the environment, quality and much, much more.
00:00:22
Speaker
Our guests are seasoned in the field of topic of their choice, even if you've not heard of them yet. This is a nonpartisan show. So while I love exploring varied views and get a buzz from a healthy debate of ideas, this is not a purely blue, white, green program. Please subscribe, tune in and enjoy the politics of everything.
Property Investment in Australia as Political and Wealth Topic
00:00:46
Speaker
Property investing has become both a political hot-button topic in Australia, where we have some of the world's most expensive housing, especially in our capital cities, as well as a great way for, say, mom and dad investors to build wealth. Safe as houses, as the saying goes. Then there are different types of investing.
00:01:01
Speaker
basically some residential, which most of us are familiar with, and commercial property investing. And I guess that's our topic today, the politics of property
Journey into Property Investment - Scott O'Neill's Story
00:01:09
Speaker
investing. So I'm chatting to Scott O'Neill. He's the managing director of Rethink Investing. And he had a big shift himself from civil engineering to property investment, achieving financial independence by the age of 28 with a commercial and residential portfolio valued at around 80 million Australian dollars. His dedication to mastering the nuances of the real estate market has propelled him to the forefront.
00:01:30
Speaker
of his industry. His dedication to empowering investors, whether they're new or experienced towards financial freedom, is exemplified through his contribution to top commercial property podcast, Rethink Investings, inside Commercial Property Australia. And he has a book, Rethink Property Investing, as well as an educational platform, Rethink Commercial Education. He cultivates a culture of learning and growth, aiding Australians in their pursuit of financial independence and freedom because of his expertise. So I warmly welcome you, Scott, to the politics of everything.
00:01:59
Speaker
Great to be here, Amber. Thank you.
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Speaker
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Speaker
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Influence of Family on Investment Strategies
00:03:14
Speaker
Okay, Young Scott, did you think you'd be a property mogul? What did you think you'd be as a kid and kind of join the dots for us? Well, I definitely didn't think I would really, I guess, you you get to anywhere near this level with property, but I guess some of my parents dabble in it. That was the old negative gearing style investors. and I just saw it firsthand how that structure didn't really work. They were kind of tied to their jobs. And yes, they had a few assets under their name, but with the cash flow and I guess the very strategy of negatively gearing meant cash flow was quite limited in our family for
00:03:49
Speaker
you know, probably compared to what they were earning. So I just felt like that wasn't a way of getting ahead. So yeah, it was always about getting a good job. So, you know, went to school, studied hard, went to ah Sydney Uni, got a bachelor's degree in civil engineering, and construction management, and that was really just to get me into engineering.
00:04:08
Speaker
And I picked the job for two reasons. One, I like the idea of not sitting in an office all day. It was good to, you know, I like the idea of getting into a construction site and moving around, seeing the world a bit. And the other reason was it paid pretty well. So, you know, I didn't want to just pick a degree that, you know, was going to restrict me from an income point of view because I knew seeing it with my family that income was important to to have a comfortable life. And that's sort of ah why I went down that career initially.
00:04:37
Speaker
Excellent. I love that. And it's good to know your backstory as well.
Changing Rules of Investment Education
00:04:40
Speaker
So tell us a little bit about, I guess not just property investing, but how it's changed in the past decade or so and what that really means today for commercial investors and maybe other property investors as well, because like all markets, it doesn't stay static and there are changes. What have you really witnessed?
00:04:57
Speaker
ah look I witness the old rules of investing don't really work anymore and this is one of the reasons we've just got such a ah large amount of resources in in the companies I've created dedicated to education. so You've noted you know the books, the podcasts, even the online education platform and it's all to do with helping people understand the commercial markets because I'm a big believer that you need both residential and commercial property to to really retire well and comfortably. like the The old method of just focusing on residential property, it does not work like people promise, and it's due to the cash flow. like People are buying four to five percent, six are you know gross yielding type properties, and the interest rates are six and seven percent as we speak at the moment.
00:05:44
Speaker
You sure they'll come down, but the yields are just not sustainable to build an efficient passive income anymore. It doesn't mean you don't get into residential property. It's the it's the greatest starting point because you can leverage 90% of the income, sometimes even 95%, so you can get in with smaller deposits.
00:06:02
Speaker
let the leverage do its thing over time. But the trick is you don't keep going down that path because you'll end up like everyone else, just with a large debt and relatively modest income and you're just hoping for capital growth. And that can take decades, multiple decades to really get ahead. And a lot of the experts ah that are in this space telling you to follow this process actually rely on business income themselves. Like they're not truly retired even though they say they are. And how would you know, I guess, right? Because they're not going to necessarily open up their books for you and show you exactly what what that position looks like, for example. That's such a good point. And talking about the politics of things, this is ah one of those controversial points that there is a lot of people in the industry that
00:06:49
Speaker
Or they they can fake it until they make it through their business income or you know like they said, there's no disclosure required ah when people advertise, particularly in some of these industries. ah So you don't know what you're dealing with. It's just advertising and you know there's very few people that would really you know open their books to to their clients. and And that's why I think there's a lot of question marks with that strategy because you know there are we don't know the true numbers. and you know i've I've gone on record with my portfolio. I've been in the AFR rich list and they actually look at your rental statements. Oh, totally. It's very forensic. I used to work for the AFR. You can't hide there. Exactly. and It's amazing. There's a lot of people in the industry that would um state they've got very big portfolios, but mysteriously, they're not on any of these public type records. That's evidence that there might be a little bit of a tall tales being told. But I think it just goes back to the point that the residential portfolio where they just you know acquired 20, 30 houses of you know middle ring suburb type houses, it doesn't solve a retirement problem. It creates debt and it does create wealth. like So I'm not i'm not kind of putting it down to a bad strategy where it doesn't make you money. It will. But if you're looking to build a passive income and actually retire,
00:08:06
Speaker
I don't think that's the strategy that can be followed like it could have 10 years ago. It's interesting, isn't it? Because it's become, I guess, an easy way as well. like People understand it. It feels very logical. And if you're heading towards retirement, I'm obviously thinking about those things like passive income, but also there's tax benefits, I guess, of having you know properties or exiting properties at that time of retirement. but Like you say, having lots of debt is not always something that everyone wants and it probably keeps people awake at night, particularly with interest rates being what they have been in Australia for the past couple of years. It's not necessarily something where people can rest easy and hope for the best. I hope that the market keeps going up and they keep having money on paper.
00:08:48
Speaker
Exactly. and And I guess the point is like everything that, you know, the benefits of residential property, like we've done a lot of education on the fact that that those same benefits are in the commercial market. So I actually commissioned a study into the long term growth rates of commercial properties around Australia for every asset class and every capital city.
00:09:09
Speaker
And the interesting data that came out of it, it showed roughly six five to six percent average capital growth rates for industrial, office and retail. And it was only about you know half or one percent less than residential over that long period. It was from 1995 to 2022.
00:09:28
Speaker
ah yet the cash flow was three times as much. So if you look at it from an overall return point of view, commercial was superior. And, you know, obviously we got to talk about the higher risks and that type of stuff. Yeah. There's capital growth. your brain on that
Commercial vs. Residential Property Investment
00:09:42
Speaker
Absolutely. So just tell us in your view, you know, how is commercial property investing different or not different from that residential investing?
00:09:51
Speaker
market. On the stock type, obviously, we're talking you know residential houses versus you know it might be in a business park or a medical facility or whatever. That's neither here nor there for me. What I'm trying to get my head around is, I guess, what's the difference in the investment strategy or the rules or is it not really that different?
00:10:08
Speaker
look super high level. Basically, we're looking at different types of properties where businesses operate and that can include industrial offers, childcare, service stations, medical centers, all that type of stuff. There is slight differences in lending, ah good and bad. The good is you can actually get things called lease stock loans, which means you can service the loans even if you don't have a job where you just got the deposit because it's a loan on the lease. So if you reach a serviceability limit in residential, which is quite common for those with a large negatively geared portfolio, you run out of steam in the bank size. Once you run out of steam, commercial can still be an option for you. So that is a positive. One of the negatives is the lending because you've got to put a larger deposit in.
00:10:55
Speaker
I actually don't think this is a bad thing once you get to a certain level in in wealth or retirement stage because you don't want to be sitting at 80% or more debt and as a proportion of your your you know investment value because it it does get riskier if you sit at those debt levels for long periods of time.
00:11:12
Speaker
like we've seen with the recent rate rises, you know where are you know people that have taken a 95% loan on an apartment in Sydney or Melbourne, they're probably feeling the pain a lot. And there is a lot of force selling going on at the moment. Commercial, you're looking at more of a minimum 30% cash down.
00:11:29
Speaker
So there's a lot more cash you've got to put into it, but that actually will, in a way, create a bit more stability ah because you know basically there's more cashed up investors that can weather the storm more when rates increase. And remember, the cash flow is better as well. So the other big difference is the pattern of vacancies. So with residential property, the pattern is you are going to get more frequent vacancies, could be annually every second year.
00:11:56
Speaker
tenants come and go a lot faster and you'll fill them quicker. So you might in a good market fill it within a week or two or three weeks. Then you might have to do that every year. But commercial you you might have a three to six month vacancy but that might be only once every 10 years. You might get lucky and buy the local medical center and it's there 40 years later.
00:12:15
Speaker
you know or fast food restaurants or childcare. It really depends on the quality of the commercial property, but the patent is less frequent vacancies, but longer when they come. So you just got to be you know prepared for those events.
00:12:29
Speaker
Absolutely. I love how you've explained that so simply as well. It it really does make sense. Is being a high net worth individual mandatory to get into that more commercial type of property investing? you know Sometimes, yeah if you're talking about medical facility, we're talking hundreds of thousands or millions of dollars. Or are you doing it as part of ah a group or a syndicate? like Is there a way to get in there if you're not necessarily someone who has a lot of spare money or high borrowing capacity?
00:12:56
Speaker
Look, it's a great question and the answer is you do not need to be high net worth. Like we as a company purchase at least 10, sometimes 15 properties per month under a million dollars. These are commercial industrial units, small you know, retail type places, little even like we bought a dentist once up in Brisbane for 220 grand. Like it doesn't really, like a lot of the value of commercial property is dictated off the rent and the rent is dictated off the square meters available. So you could imagine a small commercial property from a square meter point of view, you know, by the time you multiply the rent out and and then value it from there, it can be quite cheap. They're just going to be smaller.
00:13:39
Speaker
So they don't necessarily mean they're going to be poor quality. These more affordable commercial properties, they're just going to be smaller ones. And that's why the the warehouse type arrangement where it might be 200 square meters, that's quite small. that It might be part of a strata complex. in you know near an airport in one of the capital cities that could be cheap a lot more affordable than the average house price in the area. You can purchase some in syndicates and you can also obviously go much higher value like almost unlimited you can spend
00:14:10
Speaker
a lot more on commercial than you could ever ah on ah on a house. like you know You see the richest people in Australia buy $100 million dollar homes. um That in a commercial can be quite small. you know You can see billion dollar properties quite often in the commercial space. so Again, its size and location and the amount of rent that dictates the value of the commercial asset.
00:14:31
Speaker
Since 2015, your firm has assisted around 4,000 clients in acquiring over $4.25 billion dollars worth of real estate, strategically positively geared, high cash flow investment, and that seems to be you know working for you. Can you just share for us, I guess, your ethical and strategic approach to this business because there are other people who do what you do, Scott, but obviously you've got something magic that's happening as well. But you know is there ah an approach and a philosophy you have that might be beyond just the numbers?
00:15:03
Speaker
ah look I guess, first of all, I set this business up after my wife and I effectively retired from our jobs. like My wife was in financial planning and then got into marketing and I was an engineer at the time. and yeah We built an income up that replaced our incomes at the time. and It's only after that people started asking, what were you doing? We were in Europe for six months straight and questions were being asked. and then ah yeah i guess I guess it was a job formed of helping people buying the types of properties we were buying. and This changed over the years. like We're a lot more residential focused, but we're into unit blocks and duplexes and whatever it took to get a higher yield out of a residential property.
00:15:46
Speaker
back in the early days, but then we shifted more towards commercial because the numbers made sense. so To answer to your question, we're very numbers driven. It's the only way to invest, I think. There's very little emotion in this to the point where we don't care if a deal goes ahead ah or it goes through. it It really just depends on does the market make sense? Do the numbers make sense for the client? Are we buying it well versus the market?
00:16:10
Speaker
Does the cash flow make strategic sense to to acquire this debt for the client? and and yeah like The numbers have kind of come through over the years. We were one of the first to get into this space, but we've really held our market share just through deal quality. so um Our mentor is like we only send a property to a client if we'd buy it ourselves. and That has really extended through, you know, we've got about 70 people working here now and ah about one third of them are previous clients. So people that have actually, yeah you know, gone through the process as a Rethink investing client, they've done the due diligence with us, they've acquired multiple properties and, you know, they develop passions for it because property
00:16:51
Speaker
often does that. like It's a bit of a hobby type um industry. like you know You do it almost as a sport. and they like like A lot of people, once they've done their rounded buying and you know some of them are completely retired, they data instead of starting their own thing, they've joined us.
00:17:06
Speaker
Nice, but that sounds like you're doing something well anyway.
Avoiding Common Investment Mistakes
00:17:10
Speaker
What are some of the biggest mistakes that you see investors make? And you know it may be things like the cliches, the old styles of investing, that idea of blue chip investing only in in sort of you know places which have great postcodes or trendy locations or shiny new business parks and and things like that. Are there things that you when you're advising people, you kind of debunk some of those myths really for them?
00:17:35
Speaker
Yeah, so I guess one of the ones that I see early investors do is they they take advice from people and that are not in positions they want to get into. So, you know, they might get advice from their accountants or, ah you know, someone that's only bought one or two properties saying, this is what you should do. And they end up just following the complete wrong strategy. That's super common. It'll always be common. Unfortunately, people just take advice close to them, whether it's their parents or you know just someone As I said, that hasn't really gone through the whole process of you know being in an ideal position from property.
Debunking Tax Strategy Myths in Wealth Building
00:18:11
Speaker
and The other thing is, like on the other end of the scale, I see a lot of very high net worth investors almost look at look at things from a tax point of view rather than a building wealth point of view. An example is this. I had a guy the other day, he's looking to buy a $10 million dollars property. and
00:18:27
Speaker
He was like, oh, that probably is making me too much money. You know, it was 300,000 positively geared and he was thinking, oh, I've got to pay tax on that. So he would rather lose 300 grand and get a bit of it back in tax return time than make 300 grand and then ah pay a little bit of tax on it. Wow. It's completely back the front strategy. It just shows that.
00:18:49
Speaker
Like it's almost even hard to relate like what do I even say to that? I know what you know if my accountant always says if you're paying a decent amount of tax that means you're making money. So it's not all bad. I guess tax minimizations in some people's strategic view and you know whatever. But I hear you if it's it doesn't make much business sense when you do those numbers.
00:19:07
Speaker
Yeah, it's like um I wrote it in our book. like You wouldn't go out to acquire a cafe business that was losing 100 grand just so you can get 30K back. yeah You'd buy the one that's producing 100 grand income and then you pay 30 grand tax. Your 70 grand ah had instead of being negative 70. It's almost basic mathematics which are Yeah, it's lost on some and it's it's a very common train of thought, and which which is why the people would then go buy a negatively geared portfolio because they're often protected by another income. ah But yeah, if their job is to make wealth from this, you know, you're better off almost not investing if you're going down that other path. Absolutely. They're kind of at odds with each other by the sounds of it in some ways. Your favourite business tool at the moment and how is it helping you?
00:19:55
Speaker
Look, I've really enjoyed giving back through the education side of things, like we've like even the course that we run. like You know, if I'm being honest with you, that that's not a business that makes money. Like it covers its costs and it's really about just creating a larger ecosystem of investors that understand commercial property. Some come as clients, some go buy their own properties without us, but it's just creating more awareness on an asset class that's changed my wife and I's life. Like without commercial property, I dare say we'd still be working. We'd have decent jobs, you know, um but it would have been a totally different life because
00:20:34
Speaker
i I would have kept investing. like it's It's pretty addictive. Most property investors don't stop if they can keep going. and and and and One of the things, when if we kept building that large residential portfolio, especially now that interest rates have gone up, like it would be costing a lot to hold that thing. so yeah I'd be relying on my job and my wife's job.
00:20:55
Speaker
to to support the debt on that, especially from the bank size because they've got serviceability ah criteria well above the average interest rate. you know They might have 2% or 3% above that we're going to then service. so yeah Commercial just fixed all that. so you know Just try to educate people that you know don't go down that well trodden path of only investing in residential because There's 10,000 guys and girls in Australia telling you to do that and it's because you know they may have vested interest to keep you going down that path, whether it's the mortgage broker to get more debt, whether that's the ah you know there's all sorts of reasons, but we want a balanced view. like um I will say go down both. Residential makes more sense if you're yeah know You know, got younger, you might have time up your side. You might want to put less money into a deal. You might have less of a need for the cash flow right now. So put it away, leverage up. that That's where residential makes perfect sense. But there is a time against what society tells you. You need to stop investing in residential and come over the fence to commercial. Absolutely. Your biggest life lesson to date and what has it taught you?
00:22:05
Speaker
Oh, good question. I think, look, the older I get, it's it's time and energy is is such a limited resource. So I made the mistake of just working too hard. And I'm sort of in that stage now, but like I want to, like we got to remember the goals we set early on. And one of ours was we wanted to spend three months overseas every year, especially because my wife, she grew up in Greece and her family lives there. So we don't have much family in Australia. So,
00:22:33
Speaker
you know Just spending time off out of the business, and it's definitely cost me a lot in terms of potential growth and revenue because you know when you leave a fairly fast growing business like mine, it it does put the handbrake on it. And we decided that growth at the cost of lifestyle is is not is not the answer. Yeah. and I think that's fair enough. And the more you realise that. Absolutely.
Setting Personal Investment Goals
00:22:58
Speaker
And that probably leads into my next question is how do you define your own version of success?
00:23:03
Speaker
Yeah, look, it's freedom. And I ah feel like I'm not stressed ever when in terms of financial ah performance, so even with the business, like it's like if we have some deals crash over, or there's a something bad happens, like, and, you know, you've been working on a project for a while, and it doesn't work out. it It doesn't matter. Like it used to, like, I remember when I was a startup, and things were a lot more, you know, on the edge that you think differently, you made different decisions. That's the reality of it. But we become more conservative and less in a rush when that happens. And I've almost found that's kind of promoted growth to a degree, but it's not forced growth. it just It's more organic and word of mouth and all that type of stuff. and And that's probably how we've kind of kept our position in the market while others may be working a lot harder or or trying to force the issue. We sort of, you know, we let people come to us to a degree. And yeah, it's it's it's been a good journey, but every year in business is different.
00:24:02
Speaker
And and that's that's the exciting bit now. And just a final message for us on the politics of property investing. Look, I think the final message is just like everyone starts from a different position and and ends up and you just got to work out what your goals are. Like there's a lot of people that measure the success off the base of others, and including myself. I might see a business or you know an investor that might have substantially more. In the early days, I was like that. You're you're measuring yourself against others. But now I barely look at what competitors or others are doing because I'm content where I am. Like it's it's where
00:24:38
Speaker
I wanted to be and and and I speak with many investors that may have a lot less than myself, but they're equally or even more happy because there are you know, they've set their goal of buying three properties and you know, they might travel Australia in a camp event and with their kids and and that's their goal. So the main message is everyone just have their own goal. Don't worry about what others are doing because if you hit your goal, that's one of the you know, at least for financial happiness. That's how you get it.
00:25:07
Speaker
Fantastic conversation. If you do want to connect further with Scott and find out more about his business, there are details on the show notes. Until next time, take care.