When I opened the interview with Erica by explaining I wanted to blog about her experiences building homes, I said she’d built a lot. Her response was, ‘Oh, I don’t know about that.’
She’s built 18 houses in her life.
Call me crazy, but that’s my definition of ‘a lot’ for someone who’s not a professional builder.
After so many houses, building might seem old hat. However, you can hear Erica’s enthusiasm for real estate in her voice. She referred to it as a hobby. Even though she’s built her last house – the one she and her husband Tony will retire to eventually – Erica still advocates building as an excellent way to make profit in real estate.
But she didn’t start with investment homes. She started building houses to live in.
In decades past, people built because there was an abundance of land. According to Erica: ‘It was the done thing back then’. She was 19 years old and engaged to be married when she and her fiancé decided to build a 3 bedroom, 1 bathroom (3×1) home in Waikiki, around 40kms south of Perth city. A 3×1 seems impossibly small these days, but we haven’t always expected the typical 4×2 with all the bells and whistles we take as our due these days. ‘Small houses were the norm,’ says Erica.
She and her fiancé liked the idea of building because they could choose all aspects of design: the layout, the colour scheme, the roof materials… You name it; there were options aplenty. So they built their first two houses to live in, then Erica moved on to investment houses.
Why build investment homes?
Erica states her main motivation for picking building rather than buying existing properties is the bottom line: ‘Building for investment is more profitable than buying established homes.’ It may take 12 months from settlement on a block to having the finished product ready to rent, but as soon as the keys are handed over Erica estimates she had $50,000 to $100,000 more equity than if she’d bought an equivalent established home in the same suburb (note this is during the recent Perth boom period from the mid 2000’s to early 2013).
In 12 years, she and her current husband Tony have built 12 houses. An average of one a year – that’s a phenomenal effort, especially for two people still working full-time for most of that period. It’s even more impressive when you consider how much work they took on themselves during construction to keep the cost down. Thanks to Tony’s handiness, they’ve done paving, gardens, painting, soak wells, lights… though they have outsourced more in recent years as they found they had better things to do with their time (like holiday overseas)..
They don’t build to hold long term. They build to sell within a few years. The longest they’ve held a property after building was completed is five years. They sell when the property is still reasonably new, after they’ve taken advantage of some of the depreciation offered on new buildings, so they can capitalise on market conditions and realise their profits sooner. Erica attributes much of their success to the fabulous market conditions in Perth in recent years, and sought to make the most of them by selling while the market was high.
So how much are we talking here?
When Erica and Tony came together 12 years ago and started building investment properties, they didn’t have a lot between them. Both were coming from broken relationships, and if you’ve ever been through a divorce you’ll know that no one wins – what comes out is less than the sum of its parts. This late and low start does not appear to have restricted Erica and Tony’s ambitions, or their resulting performance. In those 12 years, they’ve managed to build a seven-figure retirement balance from the profits of their investment properties. Their retirement will be self-funded, and will keep them in the style to which they have become accustomed.
In fact, it already is. Having reaped these benefits, Erica has gone part-time (three days a week) in the last year so she and Tony can enjoy some of their hard-earned cash. They travel a lot – overseas three or four times a year – and live in a wonderful home with ocean views when they’re in Perth. This is the benefit of not having to wait until full retirement to access superannuation. By investing outside of super, they’ve got access to their cash now without penalty and can therefore enjoy it that bit sooner.
They also have their individual super funds, to which they make extra contributions, and each has shares in the companies they work for (BHP Billiton and Alcoa). These will complement their real estate profits and further enhance their lifestyle when they reach official retirement age.
With such a wealth of experience, I desperately wanted to know what advice Erica would offer someone considering building. After all, with 18 builds under her belt there’s probably not much she hasn’t seen or done. She had three main tips to share:
1. Do the math
Erica was very clear that understanding your finances and what you’re committing to is critical. She repeated a number of times:
‘Do your sums.’
Because of the progress payments and interest you’re paying on a block during construction, and the fact that there’s no rent coming in for the duration, you’ve got to have enough money behind you that the constant outflow doesn’t make life too stressful. It’s not something you want to do when you’re struggling.
That said, Erica and Tony never rested on their laurels – when the bank said they could afford to build again, they did it almost without hesitation. They had the courage to push to the maximum of their financial capacity, and it’s paid off.
2. Time the market
Erica was also very clear that understanding the local real estate market is important. Their strategy is to sell within five years, which is inside a typical market cycle. If the market turns down when you want to sell, you risk not making as much profit as you thought, and there is potential for loss. Although Erica feels real estate is always a ‘rock solid’ investment, even if she still wanted to build she wouldn’t do it in this market in Perth (2015) because of the lack of buoyancy.
3. Shop around
When I asked Erica how she selected her project builder, she said she always looked for the ‘best bang for her buck’. They weren’t always the cheapest, but she felt she got the best value packages she could – the ones that threw in solar panels, ducted air conditioning and stone bench-tops often won the day because of the quality of the finished product. These things also made the properties more attractive to buyers when it was time to sell.
If you’re interested in names, Erica has built with Celebration and Red Ink and been very happy with the product (note: neither Erica or Lacey have any affiliation with either company and receive no financial benefit for this comment).
Erica and Tony’s story is incredibly inspiring. It’s a fabulous example of how you can master a particular investment strategy and, once you fully understand it, make it work for you time and again. By repeating a pattern of building and selling within a few years, while market conditions were favourable, they’ve created the future they want for themselves.
Erica and Tony have also proved it’s never too late to start, and that with some courage and good planning you can build a substantial nest egg in a little over a decade.
Imagine what you could do if you started today…
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow Money School Facebook to learn more.