Investment Q&A with Scott Kuru
Scott Kuru’s investment portfolio is growing so rapidly he’s having trouble keeping track of all the properties he owns.
Mr Kuru is the co-founder of Sydney-based Freedom Property Investors, an investment community that identifies opportunities through careful data analysis and leverages the collective buying power of its members.
Construction is set to be complete shortly on Mr Kuru’s 16th property in his portfolio, and with expressions of interest in on another two properties, he’s certainly not sitting on his hands waiting for a better time to invest, despite the widespread uncertainty across Australian markets.
Australian Property Investor Magazine recently caught up with Mr Kuru to hear about the history of Freedom Property Investors, its investment strategy, and his top tips for those looking to build wealth through property.
How did you get into property, and how did Freedom Property Investors come into play?
My co-founder Lianna Pan and I met each other basically just doing the property tour. Anyone that gets involved in property goes through that stage where they go to all the seminars and they read all the e-books, and we met during that process.
Lianna is a data scientist and actuary by trade, so she is really great with data, and I love data. I’ve got a bit of a data background myself.
I was trying to get all the data together from all the websites and when I met Liana I realised that I had met someone that had 40 times more experience than me. She’d been doing it for 10 years already when I met her and already had 20 properties, I was like ‘woah’. That caught my attention.
She helped me get my first couple of properties and what happened is when we were doing that, in 2013 and 2014, there was a lot of media going on about property, and people were just coming to us and saying ‘what are you guys doing, where are you investing?’ and that’s what started Freedom Property Investors off.
First of all it was friends and family and aunties and cousins because we found, what we discovered, I don’t think it’s that big of a deal really, but we discovered that if we put five or 10 people together and we went to someone selling land or selling 15 townhouses, we could do a bit of a deal.
We started doing that and we have become pretty good at it. Liana would run all the numbers to figure out where we should invest, and we would then go into that suburb, pull out all the DA applications and things off the council website and we would look at them and we would contact the builders and developers and find out more about what they were doing.
And then if we could cut out the real estate agent and get in on the pre-sales we figured out we could get properties cheaper than when they were built.
Freedom Property Investors has grown its ranks considerably over the unprecedented uncertainty of 2020, how have you achieved that at a time when many investors are sitting on the sidelines trying to wait this crisis out?
At the moment, we have 50 to 60 people joining our community every single week. What’s happened is we have got some pedigree, we have been doing this for a while and people trust that.
A lot of people are looking for data, people are kind of a bit tired of different characters and charisma and things like that. People just want facts and data, which is what we do.
What I’m finding is a lot of people actually see these times as opportunity and I would agree with that. What we saw when COVID hit is that developers, landowners and builders dropped prices, better deals started coming through and the cash flow on the properties are insane.
We are finding on average the positive cash flow on the deals we are doing is about $10,000 a year.
That’s a combination of the cash flow from the rent, after all expenses, and then on top of that you have got your tax deductions, so we are finding on average it’s about $10,000 per year.
We have a lot of investors that want cash flow, we have got a lot of investors that feel that this is the bottom of the market and they are able to save $10,000 or $20,000 on a property, and a lot of people just want to take advantage of that.
I know there is a lot of media about the employment rate dropping and all of that, but we’ve still got more than 90 per cent employment, and some people are actually in a better position today than what they were pre-COVID.
I’ll give you an example; one of our members has a small craft beer business and what happened when COVID hit, he switched over to online sales and did more online advertising. The sales of his craft beer went through the roof, and he came to us and said ‘I’ve suddenly got $300,000 in cash, and I want to invest’. And he went ahead with five properties.
The other side of that is we had a member that’s been with us for three or four years, and they own a restaurant. That restaurant closed down and they were in the middle of doing another property deal with us, and when everything hit they said they have to go out.
So what we are finding is there are people that have come out but there are a lot of people that have come in. And for whatever reason, a lot of people are just finding their way to us.
I think the reason for that is I think that a lot of people that promote property or talk about property or educate people about property, I think a lot of them have basically ducked for cover. They’ve retreated and disappeared, but we are still out here.
The first thing we did when COVID hit is we just started hitting the phones to find out which developers were scared, which developers were in trouble, and which developers had risk. It sounds terrible, it’s opportunistic, but us doing deals with them has helped these builders and developers, because a lot of them wanted to keep their work crews working.
A lot of deals that we are doing, the developers are saying ‘we’re not making much money on this, but we are just glad we can keep our people working’. It’s win-win.
So let’s delve into the investment strategy, obviously you don’t buy established homes, but take me through what sort of properties you target.
We actually do more house and land than anything else. I think I can categorise house and land into four types. Type 4, this is what most people do, these are basically investment grade houses on the worst lots and the worst parts of housing estates that are in the middle of nowhere. We would say that would probably be the worst thing anyone could ever invest in.
Then type 3 would be the better housing estates and better proximity, but still investment grade homes, so they are good, but not great.
Type 2 would be a house in a good estate, in good proximity, but you pay a little bit extra and you build something that an owner-occupier is going to love. The capital growth is there.
And type 1 would be when we can go to an infill suburb, it’s not a brand new housing estate, there might be a block of land where there are 20 or 30 homes going in. Because we are big enough to do it, we will commit to the landowner that our members will take all 20 or 30 lots, and then we will go to five different builders, and make the builders fight between each other to do the best deal.
Those deals are definitely more rare, but those are the ones you are going to make more money on. We just settled one on a suburb called Algester in Brisbane. We had 26 blocks of land there and we saved between $20,000 and $50,000 on the whole development. It’s not millions of bucks but that $20,000 to $50,000, that can get you into your second property, rather than waiting three or four years, you might be able to get in in 12 or 18 months.
Every $10,000 or $20,000 you can save helps at the beginning, it really does. When we can get outcomes like that, that’s what we look for, but those are very rare, we’ve got to hunt and search for them.
Median house prices - they grab the headlines every month, but you’re not a big believer in them as a good indicator for future growth. Tell us why.
Typically rookie investors like I was once, just look at averages. You might look at the Brisbane average or the South Brisbane average, but what I realised is there are 15,000-plus suburbs in Australia and every suburb is a micro-market.
Even though the median price in a city like Melbourne may not be that great, but you can dig in and you will find greatness. You can’t invest in ‘Melbourne’, you can’t buy a share in ‘Melbourne’. You have got to buy a particular property in a particular street in a particular suburb.
Sometimes data can lie to you, and another way the 4 per cent drop in median prices can lie to you is they measure that median off of what was sold. Now what if nothing in the higher end of town was sold? What if that month, only 10 properties in the lower end were sold?
That will move your median house price. If you’re a property investor right now and you’re just following median house prices as your indicator of whether to get in or get out, you are going to fail and be a prisoner of short term thinking.
There are a couple of traps in property investing - trap number one is short term thinking. Trap number two, basing your decisions on averages because the way those averages are calculated I think they are telling lies to you, and then another trap is not understanding that there are 15,000 different markets in the country.
If you look at the data, they are not all moving together, when one is going up, another is going down, so there is always opportunity. A lot of people get this, and I think what’s happened with Freedom Property Investors, is I think that people that are just a little bit more savvy, they get that, and when they realise that we are doing a lot of research on this, I think they trust us because of that. That’s my theory.
Just looking at the Sydney market and the Melbourne market to some extent as well, obviously there has been a bit of press about the amount of rental properties that are sitting vacant in the inner cities, do you have any concerns about how that might affect people’s intentions of investing or do you think that it’s more of a short term thing because we don’t have the international migration, we don’t have the students coming?
If you look at rental vacancy, nationally it’s low, almost at record lows, and it’s heading lower. But if you go to certain pockets it’s high. In the areas where it’s high, I would not consider those a great place to invest because they are not what I call real housing, its temporary housing - international students are living there.
For me, real housing is where the cashed up, hardworking families and young professionals are, and they’re not in these areas that have experienced this fluctuation in rental vacancy. So what we are seeing is we are seeing a shortage right now in the areas where these cashed up young professionals and families are living.
There is a massive shortage of rental properties in those areas. They are not going to move into the city and move into a one bedroom studio, so the rental vacancies in the inner city to me are basically a non-factor.
There are markets within markets, and that particular market is suffering. But we’ve never recommended that we should invest in those areas.
So what are the fundamentals that attract you to an area, you said areas where young, cashed up professionals like to live, but what other attributes do you look at when you are looking at an investment property?
There are a lot of things, but the main things are being in an owner-occupier area, where people actually want to make their home. You have to think of property as an investment in a community. If you are looking for long-term capital growth, you want to invest in a desirable community that people want to live in and aspire to live in.
And you want to get a property that someone aspires to own, so when someone comes to this location, they drive around and they look at a property and say ‘that looks so nice, I would love to live there’. The other rule is the vacancy rates need to be low, another rule is that supply should not meet underlying demand.
We pull out data from Cordell Connect and we run population numbers to work that out, and it’s all the other things you hear everyone else talk about - the infrastructure, the amenity and all of the things like that.
But I think what people don’t talk about is the desirability for owner occupiers and the other one is it should be an undersupplied area. Those are the two things that I think Freedom Property would do differently from other people.