Harry has approximately 25 years’ experience in the construction industry. He has been involved with approximately $250 million worth of property developments. And he is presently helping clients create cash flow through their own developments in several Australian capital cities.
How an 18 Year Old Apprentice Started a Multimillion Dollar Property Empire
John Anderson: How did you get interested in property?
Harry Charalambous: I come from a trade background. I worked on building sites from the age of 15. Property was very real tangible to me on a daily basis. I saw the wealth that was created through property every day. Not only that, my parents had invested in property. So I suppose it was in my blood too.
John Anderson: How did you get started in property?
Harry Charalambous: I bought my first property when I was 18.
John Anderson: Well done! When you went into the bank at the tender age of 18, did you go in with your parents? Or did you go in by yourself? It’s not every day that an 18 year old goes to a bank looking for a mortgage.
Harry Charalambous: It was interesting process. I went in with my father. He already had a relationship with the bank. I had accumulated the deposit by working as an apprentice. The bank approved the loan, and then I purchased that first property. I have to admit that I probably wouldn’t buy the same property today though.
John Anderson: When you say you wouldn’t buy it again today, can you explain why not?
Harry Charalambous: Yes, of course. When I started investing I was quite a passive investor. My first property was in Auburn, Sydney. I bought it in 1982 and sold it in 1996. It did fine in terms of capital growth. However, over the last 10 – 15 years, I’ve learnt to be more active. That means I look for properties that I can add value to. I also make sure we are ahead of the game from a growth point of view. We do a lot of research to find areas that are growing and will continue to grow.
This accelerates the capital growth significantly. In fact, when I compare the percentage returns from that first property and the properties we’re investing in now, the difference is staggering. I make more in two years now than I did in 12 years with that property.
Should You Invest In Growth Suburbs Or Blue-Chip Established Areas?
John Anderson: Your biggest wealth now is what’s between your ears, because you could go into the property market with basically nothing, but your knowledge and create remarkable wealth relatively quickly. You have so many different tools to use, distinctions and contacts, et cetera, so that’s incredible wealth.
You mentioned pinpointing growth suburbs. Often the fastest growing suburbs are estates being built by Stockland and the big developers. Do you go for those suburbs, or do you go for more already established suburbs?
Harry Charalambous: I prefer more established suburbs. That’s because if you research those suburbs, find out what is being re-zoned, you can uncover great opportunities. For instance, we were in a situation where we had approval to build dual occupancy properties in a very established suburb. The approval came from state planning policy rather than a local government policy. It was a grey area in the codes.
We set up a simple process where we were able to put up two or three dwellings in an area where other people could only build one. It worked great for a while, but unfortunately the loophole has been closed now. But that doesn’t means there aren’t other areas where you can find loopholes like this.
What’s The Best Strategy to Use in the Current Market?
John Anderson: What strategies do you recommend when people ask you?
Harry Charalambous: I believe there is the right strategy for each area. And the strategy will depend on where you are buying and where that particular area is on the property clock. For example, Sydney will require a different strategy to Brisbane. In fact, we are investing in both cities right now, but using different strategies.
How to Earn Up To Twice The Yields Of Other Investors In Capital Cities?
John Anderson: Tell me a little bit about the end-to-end garden apartments strategy?
Harry Charalambous: The garden apartment strategy involves a state government affordable housing policy. It allows us to go in and look at residential blocks within established areas. And then build a second dwelling on those blocks under a state government policy. The great thing is that we actually don’t need a development application approval for the second dwelling.
It’s quite a simple process to get approvals, which means we can get positive cash flow in established suburbs within the CBD or metro areas from residential real estate. Of course, we need to meet requirement of minimum lot size, maximise sizes for the dwelling and set- backs. However, we have designs we use. The returns are fantastic.
For example, in Sydney residential real estate might get three percent or four percent gross returns. Then there are some rates, taxes and management fees on top of that.
This strategy earns us 7%… 8%… even 9 %. That’s just a gross return on the investment. When you look at the return on that second dwelling, it’s probably a 15%. This means we are getting more than twice the yields of other investors. The secret to making this work though is to look at who is going to live in the properties. For instance, you would need share accommodation if you were close to a hospital or close to a university.
But in other areas you need a design that is more like a home – a mum, dad and a child or mum, dad and two kids. The particular policy we are using is New South Wales wide. We are running this strategy successfully throughout the Hunter Valley and Newcastle areas. We are also running it in Western Sydney and on the northern beaches of Sydney as well.
John Anderson: That’s prime real estate! Tell me a little bit about how it works? Do you have a fence between the front dwelling and the back dwelling? What would be your typical dwelling out the back look like?
Harry Charalambous: Approximately 80%, maybe 90% of the dwellings are two bedrooms. We build two bedrooms, a generous living space, and in often a combined bathroom/laundry. We can also build either detached or attached garages as well.
They’re generally a small home. We would fence one in front of the other or if it’s a corner block we have two separate street frontages. We have actually wide blocks where we built the second dwelling beside the existing one and run a fence straight down the middle.
What we finish up with in most cases from a tenant’s point of view is a separate Torrens title block lock of land. In fact, for all intents and purposes they are a separate private block of land. They are separate services as far as water, power, and gas.
However, we have done one or two that are actually attached to the existing dwelling. This is often for clients who may have purchased a vacant block of land, and then purpose designed a house with an attached second dwelling. In several instances like in the Hunter Valley and Western Sydney, these second dwellings are receiving the same rental as what the existing house is.
John Anderson: Have the legislation on a state level effectively overrides any council issues and makes the planning process a lot easier, correct?
Harry Charalambous: Absolutely!
At the moment, we are only doing this in New South Wales. But we are actually going to start doing it in other states throughout Australia as the legislation come in. Throughout New South Wales there has been a shortage of accommodation. This really is just about providing more housing without urban sprawl.
This means we can keep people where we have infrastructure, shops, and in the areas that people historically want to live. It’s been a real bonus for the general public that they can have more accommodation. Whether it’s young people looking for their first home or singles looking for their own yard – it means people don’t need to necessarily need to live in an apartment.
John Anderson: This is a great way to get cash flow in major centres. I mean the Holy Grail really is cash flow in a capital city. It’s all very well to roll the dice and buy a positively geared property in regional areas. But there is potentially more risk in that. This is a way of actually getting the cash flow with less risk. You mentioned you are looking at other states now? Is the legislation conducive for this sort of strategy in Queensland or Victoria, or WA?
Harry Charalambous: It’s just opened up into the Queensland market. It’s the same strategy, but with slightly different rules and regulations as to where you can do it.
How To Keep Existing Tenants Happy When Your Building A Duel Dwelling
John Anderson: What do you do when you have a tenant in the front house? Do you have a process for managing that?
Harry Charalambous: Generally if we are buying a house that already has a tenant in it, we would go to the tenant from day one. Once we have an offer and acceptance on the property, we would let the tenant know what our plans are. In most cases the response we’ve got is ‘oh that’s great because I’ve had enough of mowing that lawn’.
We normally look for generous blocks anyway. We want people to have their own space. We want to create nice living areas for everyone. In fact, we actually design properties so that they’re not facing each other and are private. Sometimes we offer the existing tenant the opportunity to move into the new dwelling. This means they get a brand new property at the same, or less, rent.
It gives use the advantage that while we are building they are watching going ‘they’re building my brand new home’. That means they actually have a vested interest in giving us access, and helping us do the build. That creates the right incentive. Even if they choose not to take the option to move into the new dwelling, they feel like they’ve had some say. They’ve been consulted, and that’s all anybody wants.
John Anderson: How long might it take to build, because I imagine you have quite a streamlined solution for it?
Harry Charalambous: Last year we averaged about ten weeks’ construction time. They’re quite quick.
John Anderson: That’s not a great deal of time. You can normally wait quite a while to get property built, so it’s interesting to see how quick it is. As almost every property investor in Australia knows negative gearing is great as a tax strategy, but in terms of cash flow, it’s punishing.
If your circumstances change, all of a sudden you fork out this money to the property and it’s like a vampire sucking your lifestyle away. This is a great way of turning a negatively geared property into a positive cash cow.
Harry Charalambous: I agree. I have one client who came on board with us about 18 months ago. They are now investing in their fourth one of these properties. Their total income is $124,000 per annum. So they are averaging about $30,000.00 per year from the house and the granny flat.
It’s a fantastic strategy! It is well and truly positive cash flow for them. In fact, they are now thinking of offsetting some of the extra income with negative gearing to get balance in their portfolio. We are helping them secure something that has potential to grow ahead of the market, and in three, five or ten years’ time that they can then go on and develop.
This is a new stratgey that we are calling manufactured growth. It allows us to builds growth into portfolios with lower risk.
John Anderson: If I want to put a granny flat, what sort of loan to valuation ratio might I be able to get?
Harry Charalambous: 80% is very simple, provided you ticked the boxes for a lender and you have your incomes and tax returns done. Or if you are self-employed then you need to have your financials in place. We have clients that have done 90% lends, but if you do that doing you need to think about lender’s mortgage insurance.
How To Set Up Financing For These Properties
John Anderson: How would you set up the financing?
Harry Charalambous: There are several ways you can set up a granny flat build for financing. You can do a construction loan, which is popular with our clients. Another alternative is to get them classed as an extension of the existing home. You can do this because they are technically still under the same title.
However, you need to be careful. We have had people that attempted to get finance without understanding the strategy. The problem is, if you are not clear on the strategy, there’s a good chance the lender will refuse you a loan.
The secret to financing these properties is to understand what the lender needs, and then present your package to the lender in the right way.
John Anderson: I know it depends on the original house size, but what sort of land size would you be looking at securing?
Harry Charalambous: According to the state government policy, the property needs to be more than 450m². In general, we would look for land that is at least 600m² and 800m² or more. However, we have clients who have land ranging from 550m² – 2000m².
Generally, when someone comes to us, I ask them what the end result you are looking for is. We start with the end in mind. We look at their current financial situation. We look at their current portfolio. Then we figure out what they need to do to get where they want to be.
One thing we have noticed is that clients used to feel they needed two, three or four million dollars’ worth of assets to generate an income. Now it’s actually a lot less because assets can generate a lot more income.
John Anderson: Let’s assume for the original house that you get a 90% LVR. If I had say $70,000 in equity or cash that would probably get me a good sized house in the Hunter Valley. What sort of a price for the granny flat? What sort of an investment would I be looking at for that?
Harry Charalambous: Generally the two bedroom properties I was talking about earlier are running at about $115,000. This obviously depends on what we need to do with them as far as fencing and landscaping.
However, we find for a figure like $70,000 and a 90% lend, we can source a property and build a granny flat for you. That’s all you need. It works really well. The other thing to mention is that it could be $70,000 in cash or equity in an existing property. It doesn’t matter.
John Anderson: Does that mean for my $70,000, I could be looking at up to $20,000 a year net cash flow returns?
Harry Charalambous: You’ll get at least that. In the Hunter the rentals are running in at $250 – $270 a week for each property. Multiply that by two and you are generating an income in excess of $20,000. If you move into the Western Sydney market, the prices are a little bit higher. The benchmark for that area is $130,000.
John Anderson: It’s quite astonishing that in four years for a Hunter Valley property, you’d be getting 100% cash on cash return without taking into account growth. That’s just beautiful. You don’t see that very often, do you?
Harry Charalambous: No you don’t. With this manufactured growth strategy, we actually run some analysis to show our clients what their returns will be in 3, 4, or 5 years. We tend to use conservative numbers, but clients are still impressed.
John Anderson: Harry, you have given us plenty of food for thought. It’s clearly a very exciting strategy, and especially in the high population areas that we’re talking about like Western Sydney and the Hunter Valley. It is relatively low risk as well. So how do you help people?
Harry Charalambous: We can help people finding a property using our buyer’s agency service. We can help you finance it. We also do project management. We’re finding that affordable housing and the Garden Apartments are a great way to invest right now. But one of the biggest advantages of working with us is that we have several different strategies running in our office.
For example, I’ve got a DA that we’re doing at the moment on a five storey apartment building. We’re also involved in some commercial investing. So we’re very much walking the talk of the strategies. We’re implementing them in-house.
We are also helping existing investors by reviewing their property portfolio and showing them how to create some extra cash flow. Many people find they can build second dwellings on properties they already own, so they don’t need to actually buy anything else.
We are licensed builders as well. This allows us to provide the whole service in-house; a turn-key service, which is really valuable. Clients really love being able to just deal with us solely.
John Anderson: Yeah I can imagine streamlining would be useful.
Well look Harry I’ve just got to acknowledge you. As an investor myself, I always appreciate it when people are not just selling a standard property product.
You are providing an innovative service by looking at what the investor needs and wants to grow their wealth, and actually doing the work to provide it.
Obviously it’s a lot more work to do things this way. There’s a lot of management, but you have committed professionals and you do the work to provide a superior product to your clients.
So I acknowledge you for what you’ve created.
Harry Charalambous: That’s great. I am happy to help. Hopefully some of the points we have mentioned may help other people.
Before I finish, I just want to say that one of the questions I get asked quite often get asked is whether I am using this strategy myself and the answer is yes. This is a strategy that we believe in. It’s a strategy we’re running.