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What's better... Cash or Cash Flow?
When investing in property and even focusing on development, generating cash flow becomes an ideal strategy to chase.
In this episode, Stefan Angelini sits down with his brother and builder, Tristan Angelini, to talk about their experiences in Rooming Houses and Disability Houses. The revenue is very attractive, but comes with its own risks.
Stefan Angelini
Good day. Welcome to another episode. I'm Stefan Angelini from Angel Advisory. I'm here with the older, uglier brother, Tristan Angelini.
Tristan Angelini
Again.
Stefan Angelini
Go up.
Tristan Angelini
Come on, man.
Stefan Angelini
It's the easiest way to do the intro. I'm not very funny, so I'll stick with what I know.
Tristan Angelini
You are not very funny.
Stefan Angelini
So now we're talking about property investing, particularly in cash flow positive property. Because what you realize, I think, as time goes on and your investment journey matures, especially if you get into like property development and things like that, you realize a cash is great, but cash flow is so good and so much of a stress reliever.
Tristan Angelini
Hey, wait, aren't you supposed to say, like, this is not financial advice or something like that?
Stefan Angelini
Yeah, this is just general information. Don't consider any of this as personal advice. If you're looking to seek personal advice, go speak to your financial planner.
Tristan Angelini
Okay, thank you.
Stefan Angelini
You keep me out of jail now. I really appreciate that.
Tristan Angelini
Awesome. You probably go to jail these days for that.
Stefan Angelini
So we're not advising anyone on getting into property,
Tristan Angelini
This is purely conversational.
Stefan Angelini
We can talk strategy because in trying to get into cash flow positive property, whatever that might be, let's say because we're going to talk today around the more creative ventures of cash flow positive property being rimming houses and disability houses because it seems like they're talk. At the moment, we've got some experience in it, so at least we can talk about it. Not saying it's right for people, but at least let's talk about why they might be good. What are some issues you need to be aware of with the two sectors?
Tristan Angelini
Absolutely. Yeah. Well, definitely it's an emerging space. We're seeing a lot of inquiries coming through from rooming houses. That's modern rooming houses now, too, they've changed. You know, remember like, we're speaking to Bubs about our father about rooming houses, and he's like, no way doing anything like that. It's going to be problems after problem.
Stefan Angelini
Because the boarding house back in the day, it's got a
Tristan Angelini
Negative connotation. Yes,
Stefan Angelini
But we've run sharehouses shared bathrooms. Do not broken up.
Tristan Angelini
Do not get involved in anything of a sharehouse where people have to share a toilet or share a kitchen
Stefan Angelini
Or even if you're a family, everyone gets upset at each other because someone didn't clean the toilet properly. Someone left a toilet seat up. Could you imagine? It was a whole bunch of strangers together. Think about it. You think about it that way. And no wonder there's always dramas. We had nonstop dramas when we were running them, and thank God we don't do that anymore.
Tristan Angelini
It was a nightmare. Absolute nightmare. But that's why we don't do that anymore. But what is actually really popular at the moment is rooming houses that have their own facilities in their own bathroom. Each room has its own bathroom and own kitchenette. So you have your own space.
Stefan Angelini
So basically like a micro apartment.
Tristan Angelini
Yeah, it's like micro apartment style. Not an apartment, it's a room. But one b dwellings. Technically, one b dwellings.
Stefan Angelini
So it's not a normal house. One thing with rooming houses is the different kinds of permits you need. With rooming houses, it's quite a different avenue. Don't want to talk about that just yet because we can go pretty deep on that.
Tristan Angelini
Yeah, we can go deep on that. That's probably for another time because we can get down the rabbit hole.
Stefan Angelini
But you can renovate a house to become a rooming house. We've done that once. But people might renovate a house because they want to increase the amount of bathrooms and then make it a sharehouse. That's scary in itself because there's all the issues of people sharing facilities. You can renovate a house to make it a room here, make it a proper micro apartment that people are calling it, but still very expensive. Hard to get the nine-bedroom limit that you can get.
Tristan Angelini
Well, look, from a cash, we'll talk about cash flow properties. A rooming house, you are yielding more because you have the ability to rent out each room. And depending on the level, I mean, that will be for another time that we can just talk about rooming houses and the strategies behind it. But, yeah, they can yield you a good passive income on a property because of being able to get more rental out of each room instead of in just one.
Stefan Angelini
Think that if you got one dwelling, you rented out to a family. Let's just say you rent it out for $500 a week. One family pays that secure because they take a one place. Whereas if you got to say rooming house, you rent out rooms for $250 a week per room.
Tristan Angelini
Look, minimum. At the moment, what we're seeing, a lot of these rooming houses that we're building are renting out at $300 inclusive of bills.
Stefan Angelini
That's crazy. And there's a rental shortage at the moment, so it's going to be coming more demand.
Tristan Angelini
Yeah, absolutely. So nine nine bedrooms times by times that by 300. What's? That
Stefan Angelini
A lot.
Tristan Angelini
2700?
Stefan Angelini
Yeah.
Tristan Angelini
Remember I got kicked out of school.
Stefan Angelini
So I guess rooming houses has its risks in itself, operating it. Obviously, there's some bad things that can happen in there, getting it done and up and operational. It's not your typical bank finance, which is what I've realized.
Tristan Angelini
Still, it's banks don't like it at all.
Stefan Angelini
They hate it.
Tristan Angelini
Maybe, I don't know. Is it a high risk,
Stefan Angelini
Still high risk asset? Don't forget, no one knows anything about it. Still a new industry, these new micro apartments, whereas you got the old boarding house.
Tristan Angelini
So renovation issue, I think, is a bit of an issue.
Stefan Angelini
You got to fund it with cash.
Tristan Angelini
Well, the rooming houses that we're doing at the moment are brand new builds. So purpose built one B dwellings. Banks are starting to recognize this as an actual asset, as a well, performing asset. It's in a transition from a negative, from that real negative connotation to there's a lot of brands that are building up around the rooming house space, and it's actually quite exciting, the new asset class. But there's a lot of people who lives in there. You ask who would live in this place? I would personally live in there. I mean, a lot of the people that we have in our space and a lot of the builds that we do, you've got maybe
Stefan Angelini
People are still working. They're working class people because the rents are 250 to 300 a week.
Tristan Angelini
There's prison officers. There is doctors, nurses that are living in these spaces. When someone, a doctor works 80 hours a week, he doesn't want to go out and mow lawns on a Sunday and maintain a three bedroom property. He might just want to need a room and just store my things here and that's it.
Stefan Angelini
The house is close to the hospital, definitely. There's no apartments around.
Tristan Angelini
Think about it. If you're in one of these places, if you're in a rooming house, it's like a micro apartment anyway, it's brand new, and you have more of your spare time using facilities within the area, or you have the ability to save up, actually. Save how many people now are paying $500 a week plus bills plus to maintain the property. You're not left with much at the end of the day as a renter.
Stefan Angelini
No. Well, probably pass me on to my next point I want to talk about is the actual financial profit and loss, which sort of I get more into and I dive deep into what the expenses are because top, top line revenue sounds really good. Then you look at the financing strategy behind it. You need more cash to put into these things. And if you are going to a lender, it might not be a big bank lender, it might be a smaller lender. Therefore the interest rates are higher.
Tristan Angelini
It's going to build them. Private lenders are the way to go.
Stefan Angelini
Yeah, the interest rates are higher. That's the thing. So just then it diminishes your end of day net cash flow because you're paying more.
Tristan Angelini
Depends on you. Is it a long term investment or is it a short term investment?
Stefan Angelini
Yeah, well, the argument we always have is always look at bottom line, the end, the end figure what's our end net profit versus just getting these things up and going?
Tristan Angelini
I always look at it as in get the thing up and then try and refinance it out or something to another lender that's got a lower interest rate on a longer term.
Stefan Angelini
When they get it. Yeah, when they get the asset class.
Tristan Angelini
Yeah. If they get that asset.
Stefan Angelini
But that's why you might need more cash in the project to get that finance when it does come through, because of specialized asset. A lot of these big banks don't look at the specialized assets. They might fund them at a 50% LVR.
Tristan Angelini
And it is a higher risk product, isn't it?
Stefan Angelini
Yeah, that's right. We got nine people under one roof. Yeah, people scary things can go wrong.
Tristan Angelini
Well, yeah, but I think that's how banks categorize it in that they must go to their credit departments and go, this is a high risk asset because of they don't have the history of the trading aspect of it. But if you want to go buy a house and land package out in the back of. They'll be like how much money do you need? Actually, little, only 95%.
Stefan Angelini
I know, I know from so from a financial analysis coming back to where we were, it's interest costs, construction costs are higher because the specialized dwelling obviously yeah, of course you need a special kind of insurance. So you need two kinds of insurance. General, it's almost like you're operating a motel is the way insurance companies see it because it's still not recognized.
Tristan Angelini
Insurance cost, there are a lot higher.
Stefan Angelini
But explain to me the way they're rented out. You rent it out and who pays the bills? Who pays the gas, electricity, Internet, all that?
Tristan Angelini
Well, it all depends how much you want to depends on the purpose of how you want to rent them out too. Do you want to include all the bills normally?
Stefan Angelini
What are you seeing?
Tristan Angelini
Well, normally what we're seeing is people like to have it all inclusive. Because if someone wants to rent a room, maybe they don't want to have the ability to pay the bills, paying bills at night time. They just want to have it all inclusive. I'm happy to pay it in my rent.
Stefan Angelini
253, that's it. Nothing above that. I know my budget.
Tristan Angelini
That's my budget.
Stefan Angelini
Gas, electricity, all those prices going.
Tristan Angelini
Some houses that we build and obviously some that we've built personally have individually metered. So electrical meters are individual.
Stefan Angelini
Which takes time to monitor.
Tristan Angelini
Well, yeah. You got to monitor. You need to have smart meters installed.
Stefan Angelini
Yeah. And then do people want to live in a place like that when there's other options out there we don't have to worry about it like the individually meter.
Tristan Angelini
There's not a lot of data to say who prefers to be honest.
Stefan Angelini
It's new. Such a new industry.
Tristan Angelini
So new.
Stefan Angelini
We saw recently cost electricity skyrocketing up in the cost of gas. And then through winter, everyone wants to use the heater.
Tristan Angelini
There's a pros and cons. Everybody wants to you're not paying for the bills.
Stefan Angelini
You got to make sure you put solar on it.
Tristan Angelini
I don't care if the lights are on all night. I don't care if the heaters on all night. No.
Stefan Angelini
So this is where it starts to get risky because you can't control these expenses.
Tristan Angelini
Yeah.
Stefan Angelini
It's if you property management is higher as well, because you got the property manager managing the house, managing a whole lot of people.
Tristan Angelini
Yeah. So that comes back to the strategy. And like I said, we can talk about this hours and hours and hours upon end. But ultimately, strategy, is it a long term investment or is it a long term investment?
Stefan Angelini
Yes.
Tristan Angelini
Therefore, you have to have a different mindset. You want to make sure that your renters are in there long term and they're in a harmonious environment because ultimately they're going to keep paying their rent.
Stefan Angelini
You want it to stay. You want turnover.
Tristan Angelini
You don't want to come there for a year, fill the house up and then it becomes a dive because there's just nobody treats the house right.
Stefan Angelini
Because normally
Tristan Angelini
There's no upkeep
Stefan Angelini
The added expenses when people move out and in, is normally with the property manager, you got to pay the new letting fee.
Tristan Angelini
Pay letting fee fees. That's right. And then if the house is the common areas and all that sort of stuff is, is, is left unattended to or unmaintained, what's going to happen? It's going to turn into a shithole. And then people are just going to you're going to just get the lower class and a worse class of people undesirables that want to drop your rent, drop your rent, drop your rent. You end up getting to zero.
Stefan Angelini
That making you lose money.
Tristan Angelini
That's right.
Stefan Angelini
And you have probably more experience before you got to sometimes you got to lose money to learn.
Tristan Angelini
Yeah. And like, everybody deserves the best thing is, honestly, is that it? Is that giving more affordability to people with housing? Yes. Because there is a lot of people out there that are struggling at the moment. There's a lot of people struggling to pay their rent. And it gives the ability for them to actually try and save to get into something better. It's a good stepping stone for them.
Stefan Angelini
Yeah. So people have to pay for their own rent. And then there's a big industry that everyone's talking about being disability homes and the NDIS let's talk about disability homes for a bit. A lot of promotions around buying rooming houses in suburbs, which might be the right strategy, but we'll look at first, you know, a bit more than I do around the NDIS scheme, what's happening. Can you explain to me? Because my knowledge is like this.
Tristan Angelini
Yeah, look, it's very, very difficult to navigate through the NDIS and how the disability housing structure works, but obviously there's a lot of funding that's coming in from the government through the NDIS or NDIA in the scheme to provide more disability housing to people,
Stefan Angelini
Help people get out of aged care, get out of their parents house
Tristan Angelini
Housing homes. Yes. To have more independent living. But then what happens is a lot of investors have sort of come into the market. They've seen the funding table that comes from the NDIS saying, wow, revenue is great, and I can get a rooming house here, I can get 40 grand a room, I can just build a rooming house in the back of woop up again, and I can get $40,000 a room. But it's not that easy. It's just not that easy. And a lot of people that I've experienced and I've dealt with, they've built these houses through other people, or they've been sold from a marketing company, and then nobody actually wants to live in there, and it just becomes a roomy house.
Stefan Angelini
Well, I'll give you an example of a marketing company that sold one and not the purchaser. Not thinking about the finance facility. Normal banks still don't recognize the asset or the income stream because the income stream is risky. And we'll get into that in a bit. So when you try and go to, like, a big bank to finance it, they're not going to give you 80% of what you think, the values, they're going to value it as a normal house, or you paid for it.
Tristan Angelini
They might value it at 50% LVR
Stefan Angelini
Even if it's a new construction, then you got to go to a second tier lender who might recognize evaluation, a house valuation, but the income is a commercial loan, and therefore you're paying a higher interest rate on it because it's a specialized asset. And then you look at the numbers saying, all right, well, I might get a lot of income coming through, but again, my finance cost is blowing out, so I'm putting more money into settlement and I'm paying a lot for the for the interest on it.
Tristan Angelini
Yeah.
Stefan Angelini
Which sort of leads me into my next point as well, is the leasing terms on these things. And and so there's two different ways to sort of have a lease. There's a normal lease where the we're called the SDA provider is that right? Is that what it's called?
Tristan Angelini
Correct.
Stefan Angelini
SDA provider gets the rent from the tenant or the tenant seal provider from the NDIS is meant to pay that landlord under a normal lease agreement if your house isn't tenanted.
Tristan Angelini
Yeah. So you have that individual house has to be registered under SDA from what I know. And then you get through the participant that you rent the house out to, they will get a funding from the NDIS to pay for the rental in that room. Now, that individual person has a plan from the NDIS and in that plan they have an assessment made on them by all the professional services that assess that particular participant on if they are granted SDA or not. Majority of the times, from what I've seen, a lot of the participants have high physical support, which means they need a wheelchair, they might need a hoist, or they are in a robust category. But even in the robust category, there's not a lot of people that get granted SDA funding. So disability funding for the house.
Stefan Angelini
Who chooses where the person lives?
Tristan Angelini
The participant?
Stefan Angelini
And what if they want to move houses? Can they?
Tristan Angelini
Straight away
Stefan Angelini
So more of these start popping up and the participants have the opportunity to choose where they want to go. They don't have to stay in the one house that might be away from shopping centers and everything like that. They could move to a new place that's closer to facilities.
Tristan Angelini
We have, we have people that we know very close to us, family that are in that position at the moment, and they want to live. Even if the participant, they want their family member, their loved one, to live close to amenities, to live close to the family. It's not a builder and they will come. There's a lot of independent preference from families on where they want to live. People just don't have disabilities and I just throw them into this house. It's not the purpose of it. You want to be able to be a harmonious environment, you want it to be able to be close to amenities, close to services. There's a whole strategy behind it and ultimately the individual participant gets a choice. Under the residential tenancies act, they can still move out in twelve months. So you could build something for somebody and if it's not up to par or they don't like it, they can move out.
Stefan Angelini
But the picture will choice. These people won't move out, but no one knows that. And the risk is that if you got just a normal lease agreement and the SDA provider saying we'll take 10% as a management fee, you take 90%. But if it's not tenanted then well, bad luck. No one gets anything. We don't get anything. You don't get anything, which is I get it. Fair enough to me, poses a massive risk. But I guess it leads us on to.
Tristan Angelini
If you're a bank, you're going to just look at that and go, massive risk, therefore I want more cash from you.
Stefan Angelini
That's right. Yeah. That's why they're priced things. But then you've got the other alternative to the leasing is a head lease. Can you explain the head lease to us a little bit?
Tristan Angelini
Well, you firstly got to find someone that wants to enter into a head lease because they're ultimately taking the risk if that participant moves out
Stefan Angelini
Because they are dedicating to where we'll pay you rent for a certain period of time.
Tristan Angelini
And usually they are a sill provider as well, which is a supported independent living provider. So they're their day to day taking care of those people and obviously they need a premises to care for that particular person, but they're taking obviously the financial risk as well.
Stefan Angelini
So they pay more and you'll get less in terms of return, but you've got less risk. You've risked yourself because you've got a secure income stream for certain amount of time and therefore you got to weigh up. Is at worth? Is the financial sacrifice worth the risk that I'm taking off the table?
Tristan Angelini
Well, fundamentally with SDA and you have to look at put on your conscious capitalism brain and say I'm doing a good thing for the community and helping people get out of room that has to be your driver. If you're thinking that you're going to get into disability just to make money, you are severely mistaken. Your driver has to be, I want to help people. Number one, right, now you are going to be making a profit at a marginal return on it. Yes, but don't think that it's all the government's just throwing heaps of cash at it and you're going to be getting heaps of money from it. No, that person that's going to be taking on that risk ahead lease, they've got bills to pay too and they're taking a huge risk. That person may not be able to fit into that facility anymore. They've got to pay that rent to the landlord, ultimately the person who has built the premises. So, yeah, ultimately, what we want to do, I think that anyone that has the developers that get into that space or the investors that get into that space is put on a cap and say, I want to invest in property for a purpose. And this is good for a community, for the community in general, and then you'll be successful. Whether it's making a 3% return or a 6% return, who cares? At least you're in the market and you're making a difference. It's good for your heart.
Stefan Angelini
Yeah does it delivers a good feeling is a really good feeling and obviously there's different construction considerations which we can touch on another time. But I guess the main thing I wanted to understand is that the risk on the table, risk off the table, differences in the leases, the class of building, which is the reason why construction costs are a lot higher depending on the level of
Tristan Angelini
Participant,
Stefan Angelini
The level of the participant and the payment you want it means there's different levels of construction. Right? Class three buildings.
Tristan Angelini
Look, a lot of them is depending on who the buildings are. But when you do get involved in an SDA property, you just have to remember that it's virtually like a commercial building and people with disabilities, they don't have the ability to get out of a house in case if there was a fire or anything like that. So though the SDA says that you don't have to build an SDA property with sprinklers. You don't have to if it's a high physical support, you should be doing it. You should be putting a house with sprinklers in there. Because ultimately and that's the conscious that you're going to have to have in case if anything was to happen.
Stefan Angelini
That's expensive to do because you got boosters.
Tristan Angelini
Well, you have to check the pressure.
Stefan Angelini
Of the water onto the roof.
Tristan Angelini
You got to check the pressure of the water in the street, make sure that it's ample enough. It's another added cost. And you have to get a design. You have to get a fire design. A lot of the times you have to get SDA consultant and access consultants involved in the process to make sure it complies. So there's a lot of what we call preconstruction costs or development costs that you would have to spend beforehand. And it's also a specialized build a normal a commercial builder. It's probably too small in contract value for it.
Stefan Angelini
Yeah.
Tristan Angelini
And a residential builder, that's how to do it. Well, they just don't have the they're not customized enough in order to do it. It's its own little niche category, really. From a custom builder's perspective, you have to know both. You have to have the team in order to be able to build it and liaise with consultants and engineers.
Stefan Angelini
There is a lot that goes into it.
Tristan Angelini
And ultimately, even when you do build it, you have to have a passion for the end product as well.
Stefan Angelini
Yeah.
Tristan Angelini
You know, it's it's it's good to see that you're building something for for people that have disabilities.
Stefan Angelini
Yeah. Well, they need it. So that's why it's there. It's why the NDIS exists.
Tristan Angelini
Yeah. And you know what? A lot of the times I've seen and I've gone to nursing homes and seen, you know, the the way that some some people live. And, you know, one girl that we met, she was in a nursing home. She was only 35 years old. Like, talk about her life. I mean, she is making friends with people in nursing homes. So she might be friends with, you know, Beatrice. And Beatrice, she's 89 years old. That's her friend. And then next thing you know, Beatrice is dead, Beatrice dies of old age, and then another person comes into the nursing home. So not only have they got a physical disability, they're starting to develop mental disabilities, too, because they're surrounded by death. F*cking terrible.
Stefan Angelini
Yeah. That's why it's so important.
Tristan Angelini
Yeah.
Stefan Angelini
There's more out there. Great.
Tristan Angelini
There's more out there.
Stefan Angelini
It's fantastic to buy a be aware because it sounds good from a financial perspective. Like it's a good feeling if you're doing something that's providing good, but still, it's it's be aware. And I guess just as we wrap this up, something we do at Angel Advisory. So if you're thinking about getting into these kinds of investments, we're offering a free assessment of this situation. We don't recommend property or anything like that. We just look at personal situations and help you understand the risks that are involved and whether or not you can do it or not. So, mate, I want to wrap it up there, probably. Thank you. I need to finish by saying this isn't personal advice, this is just general information. So if you want to consider personal financial advice, go see a financial advisor. I appreciate it. Anything you want to do to sign off?
Tristan Angelini
No, that's it.
Stefan Angelini
Cool. So Tristan runs Hillbrook Projects. I'll give you a plug and you guys do disability construction, rooming house construction and all that's on your website, so people have any information and they know where to find you.
Tristan Angelini
Yeah. Hillbrook.co Hillbrook.co. I'm not too good with the whole promotion aspect.
Stefan Angelini
Cool. All right, mate, We'll sign off. Thanks.
Tristan Angelini
Thanks, Bro.
Stefan Angelini
Appreciate it. Thanks for everyone for listening. See you soon.