How a Long-Ignored Gym Became a 9% Net, Multi-Income Performer

Yeah, so I bought a gym for $1 million, uh, 200 grand under the asking price. Net income was about over 9% yield, and, uh, 10.5% gross yield. Um, good deal.

Hi, I'm Andrew Wright, principal of Professional Southport, and this is the Andrew Wright Property Podcast. I've built a multi-million dollar property portfolio delivering a seven figure annual rental income. And led my real estate team through thousands of sale and lease transactions. In each episode, I share real deals and strategies that will help you find, fund and operate profitable property deals.

The aim of this show is to provide education and build a community of like-minded investors who can collaborate, share insights. And help each other in each other's journeys. You can make excuses or you can make money, but you can't do both. So come and join us.

Adam:: Hello and welcome back to the Andrew Wright Property Podcast. Now today we're unpacking why a gym with two units above is a powerful mixed use play, two income streams, low vacancy risk. A better bank appetite. We'll break down Andrew's Gatton purchase at a million dollars and how he solved a lease option problem and how it's performing today.

Andrew, welcome back to the podcast.

Andrew:: Adam, how you going?

Adam:: I'm really well. Listen, before we get started, is this Adidas or Adidas? How do you say it?

Andrew:: Oh, I say Adidas. What do you say?

Adam:: I say Adidas maybe. What about, is it Nike or Nike?

Andrew:: Ooh. I think I've used both at different times.

Adam:: Yeah. Well comment below. Tell us how you say it. We have a bit of fun with it. Fantastic. All right.

Andrew:: 200 grand below asking. Yeah, they initially were advertised at 1.3 million. So this property was again, advertised online. Anyone could have bought it. 1.3 million they were asking. And been online for nearly two years and they dropped the price to 1.2. So obviously everyone thought it was too expensive. In real estate terms we say a listing goes stale after a month or two. Couple of years is pretty stale.

Adam:: Had you seen it earlier? Were you following it?

Andrew:: No. But you look at every listing. How did you not know? Well, it wasn't a new listing. You get the notification for new listings. That was before I started my internal job description of looking at listings every day. That was three years ago now, and I'd only just started looking at all the new listings.

Adam:: Do you get a notification if there's a price drop? How did this come into your field?

Andrew:: Well, no, I didn't know there was a price drop from the ad. It just said 1.2, but as a real estate agent, I have a subscription to RP Data. Core Logic or Totality. It's rebranded. Through there as an agent, you can go through and have a look at all the advertising history. And I just went through and as I do for every listing, I went back and saw that it was advertised for 1.3. And when I rang the agent, the agent said, oh, look, Andrew, they wanted 1.3. They dropped it to 1.2.

Adam:: So you did your research, saw it'd been there for two years.

Andrew:: But what I wanna say at the start of this podcast is that at 1.2, this wasn't a fantastic deal. So when I say it's important to have a skillset of finding great deals when you're buying property, you don't always find great deals. You need to make them. The fact that I bought this at 1 million made it a great deal. At 1.2 million, I didn't find a great deal. I made it a good deal.

Adam:: Talk us through the negotiation then. You've found this thing. They're asking 1.2. You know they've dropped from 1.3, you know it's been there for two years. Talk us through the negotiation and your thoughts.

Andrew:: Look, there was some sort of emotional thing there. I went to school in Ipswich, so I bought property in Ipswich. I was born in Hervey Bay. I bought property in Hervey Bay. I went to Gatton Agricultural College when I left Ipswich Grammar School and even though it's a small regional city, which some may suggest implies a higher vacancy risk, I knew the city pretty well. When you know a city well, you know people there, you've been there, you've lived there. It brings you into some comfort zone that takes away a little bit of fear.

So I had the mindset of, yeah, I wouldn't mind buying a property there. It's in the main street of town, Railway Street. If I don't get it, I don't care. I'll buy something else, but I'll put in an offer. I offered him 950 and the agent said no. Came back a few days later and sort of wrote me off as not a serious buyer. I chased him. He said no, they won't sell for 950.

I let it go for a few more days. I said, hey listen, will they take a million? Oh, I don't think so, Andrew. We'll give it a crack. Came back on the phone. Look, Andrew, I'm happy to say owner's circumstances have changed. They've been trying for two years to sell this one, they're gonna take your offer. I just said, wow, great. Let's have a crack.

By making an offer and being disciplined, a week later we did a deal at a million. The rent at that stage, gross rent 105 grand. So 70 grand from the gym downstairs, 35 grand upstairs from the two residential leases. 105 grand on a mill. That's 10.5% gross yield, about 9% net, and I'm borrowing at 6%. No brainer.

Adam:: Numbers stacked up at a million. What would you have gone to?

Andrew:: I might have paid 1,025. Only a little bit more. When you're buying in a regional setting, there is a little bit more risk. You want to get a higher yield to compensate you for that risk. You don't get 9% net in Brisbane or the Gold Coast or Sydney. It doesn't exist. If you're going out to a regional area, you need the higher yield to compensate for the extra risk.

But I knew the residential was very low risk in that area. The leases upstairs were under rented. The tenant in the one bedroom apartment was only paying 280 bucks a week. And the two bedroom, they're only paying 400 a week. I thought, well, I can increase those rents.

Now the two bedroom has gone from 400 to 480, extra 80. The one bedroom has gone from 280, now paying 315, extra 35 bucks a week. Between the two, that's an extra $115 a week rent, five grand a year. And the gym downstairs, the rent has been indexed to CPI. They're paying an extra five grand now, from 70 to 75.

Total income about 117 grand a year on that million now, which is nearly 12%.

Adam:: The residential would've been on 12 month leases?

Andrew:: One was six, one was 12, but now they're on 12 month leases each. The gym had been there a long time with a three year lease with two three year options. When I went through the due diligence period, I asked the agent to confirm that they'd actually exercised their option. The agent said, oh yeah, yeah, yeah, they've exercised the option. I said, can you gimme proof of that? Well, no, I can't.

So I wrote to the sellers and said, can you please provide evidence that the tenant has validly exercised their option? And they said no, Andrew, it wasn't validly exercised.

Adam:: So the agent wasn't telling the truth.

Andrew:: So as part of the due diligence, to protect me, I didn't want the gym moving out straight away. I said, look, I will satisfy this due diligence clause if you enter into what the lawyers called a deed of extension. The owner of the property and the tenant both agree to continue as if they had validly exercised the option to extend the lease for another three years. That provided me certainty the tenant was locked in for another three years and couldn't move out tomorrow.

Adam:: And on that basis you were willing to move ahead?

Andrew:: Yes, correct.

Adam:: So you went into this one purely on the numbers then? There wasn't a plan to change anything?

Andrew:: I couldn't add value. There was no way to add value. It wasn't a property development deal or a value add deal. It was just a good deal. Based on the numbers, I made it a good deal.

Adam:: I think it's a really good mix. Can you explain why?

Andrew:: I think it is a good mix. The Southport one was a rooming accommodation boarding house situation. Whereas this one is renting out two whole separate apartments. A little bit different, but basically resi on top and retail below. I think it's a good mix because there's three incomes in that property, which is a diversification of tenants. It's also a diversification in the type of income — residential and retail. It lowers the risk profile of the asset.

The gym on the bottom floor hadn't just moved in. They'd been there a long time. If you've got a business and your customers need to come to you, like a 24 hour gym, over 10 years you develop goodwill. It's not easy to move that business somewhere else because people don't know where you're going or it's inconvenient for them. If you get a tenant that's been there 10 years, they're probably not wanting to move as long as they don't outgrow the place. That gave me confidence.

Adam:: And Gatton being not a huge place, there wouldn't be many other places to move it.

Andrew:: And if it's on the main street, it's a prime location. Everyone in the area can get to it.

Adam:: You think about a gym, all those weights. Can you imagine having to move it all? The equipment, the leg press, the squat racks. It'd be really expensive to move all that equipment and start up elsewhere.

Most of your deals are outside big metropolitan cities. You look at every listing which would include metropolitan cities, but you're finding the numbers are better outside. Is that right?

Andrew:: In recent years, yes. I bought a residence on Sovereign Island on the Gold Coast 20 years ago. I bought offices in Southport 20 years ago. I still hold them. I bought 36 Nerang Street, a retail and boarding house property, six or seven years ago. I bought my wife a penthouse on the Gold Coast.

I still have property on the Gold Coast, but the last five years, when I look online, I don't see the value there anymore. Maybe I'm wrong, but from a long term capacity to hold property, the net returns of Gold Coast property, in my opinion, it's just very hard to scale a portfolio because you're negatively gearing them.

Even the commercial ones I talk about, you're getting four or 5% return on the Gold Coast. Interest rates are six or six and a half, you're losing money unless you're putting a 50% deposit down. At the moment my preference is major regional areas. If I had a hundred million dollars, I might buy in metro areas. But for me, I'm trying to find things that actually make money, that provide higher than 6% income because I'm borrowing money at 6%.

Adam:: How did you finance this deal?

Andrew:: 40% deposit, bank. Because I had the resi upstairs and the gym downstairs I was able to get a lease doc loan. I dragged out money from that Ipswich deal that I revalued. I got a million dollar uplift there from spending 350, and that extra 650, I was able to redraw a fair bit to go and buy.

Adam:: Redrawing is part of your overall strategy to build the bigger portfolio so you can continue to come up with those deposits.

Andrew:: You never really know how much equity you bought in a property unless you sell it. I thought that property was a value of 1.2, 1.25 immediately after I bought it. There were a couple of other sales in the same street at really high prices. I thought the valuation would come in at 1.25 to 1.3. Came in at 1,150. Only went up 150 on the valuation. I completely disagree with the valuation, but at least I was able to grab a hundred grand out of that to help finance the sheds in Hervey Bay.

Adam:: Before we finish, anything go wrong with it? Or is this just a standard good deal?

Andrew:: For the main, just a good deal. I had a couple little roof leaks there. I spent six or seven grand in maintenance getting roofers up there. But for the most part, I haven't had any problems. The gym tenant has just signed — we're three years down the track now — they've exercised their option to extend for another three years.

It's just leave it there and let it do its thing. Hopefully I will revalue again in another year or so and hopefully it'll value up a little bit higher and I can redraw a little bit more out of it.

But one lesson I want to make sure people get out of this is that you don't just find great deals, you gotta make 'em happen. If they had advertised that at $1 million with 105 grand rent, it would've sold a hundred times over. But it wasn't. You couldn't just find that deal for a million. You had to make the deal. It was advertised at 1.2 and at that price, it wasn't the best buy of the year, but I made the deal happen.

Adam:: And that brings me to a point. This really is your passion. If there's listeners out there who have joined your community and mailing list, they've got questions or a deal on the table that they'd like some advice on. Are you happy to take those emails and respond?

Andrew:: Yeah, look, I love doing this. It's fun for me looking at deals and within five minutes I can say, yeah, it's a go, or maybe it's a go, you gotta check out X, Y, Z first, or no, there's a red flag there.

Adam:: That's huge. If you're out there listening and you have a deal you're looking at and want some advice, reach out to Andrew. Send him an email. You can contact him through Professional Southport as well. This is about a community, people getting together and helping each other out.

Adam:: Final question. 2011. Didn't Gatton get absolutely smashed by a flood?

Andrew:: I honestly don't know, but that particular area is definitely not in a flood zone because I looked on the flood map.

Adam:: I remember the big floods of 2011 where you're seeing people on roofs. Part of Gatton was affected. But so was Toowoomba.

Andrew:: That property hadn't flooded. Believe it or not, there was actually a major fire at that property. The place next door got completely taken away. There's some black marks on the outside of the bricks of this property as part of the history there. But no flood incident.

Adam:: In both this episode and the last episode, you've talked about unexpected expenses. Six or seven grand for this one for roof leaks. And 46 grand in the last one for cooling equipment. If there are people listening looking at a strategy like yours, moving from residential — obviously you still need a kitty with residential property, but probably not to the extent you're talking. What's your advice on what you need to have available in liquid funds?

Andrew:: Great point. I'll share something that will probably surprise you. I've bought so much property this year, seven properties. I don't actually have the 46 grand to fix it. I don't have it.

Adam:: Where did you get it from?

Andrew:: I asked the tenant to pay for it and I've told them I'll give them a rent credit. They pay 7,000 something a month. I'm giving them a credit. They wanted it fixed. Actually, they wanted some of them upgraded, not just fixed. The cold storage facility had a certain cold temperature and they wanted it colder.

I said, well, if you want to upgrade it, I'm not upgrading your rent. You better sign a new lease with me and you pay for it. I'll give you a rent credit. And they said okay.

Adam:: So it's thinking outside the square.

Andrew:: It's a bit embarrassing. Look, you should have a buffer. I'm not saying that's the way to do it, but because I've spent all my money buying all these properties, I didn't have enough buffer to cover that. So I've got the tenant to pay for it. I'll give them a credit for the next however many months.

Adam:: Overall, you would need a much bigger buffer depending on the asset.

Andrew:: If it's just a normal shed, you don't need a big buffer if you've got long leases. If it's outdoor truck parking, not much can go wrong. For a house or retail property or an office, you're probably gonna have to put more money aside, or be working hard in your business with good cash flow.

I run the gauntlet. I'm probably not a great example on keeping enough cash buffers. There's a guy in America called Grant Cardone, and he always keeps himself broke and it forces you to work hard every day. I'm under pressure. My credit cards are always being used. I'm always redlining it, but I'm motivated every day to work because I'm under pressure.

Adam:: Well, in no way can this be construed as financial advice.

Andrew:: Don't listen to me about cash buffers. Go see a financial advisor.

Adam:: Fantastic. Please hit follow so you don't miss any episode. Jump into andrewwrightproperty.com.au. Join the community. Give us a rating. Share this podcast so you can help us grow.

Andrew, once again, thanks so much and really look forward to the next episode.

Andrew:: Thanks, Adam. Appreciate it.

Thanks for listening to the Andrew Wright Property podcast. This is all about building a community of like-minded investors who can share real life stories, experiences, and collaborate with a view to helping each other.

Join us. Get in touch through the link in the show notes. I look forward to you joining me on the next episode.