TEITR 402 - Evan Thornley

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[00:00:00] Veronica Morgan: In this episode we are talking with Evan Thornley from Longview. We'll be diving into three big themes, why Australia's housing market is structurally broken, and what needs to change, how investors [00:00:10] can think differently about property ownership through emerging models like equity funds and what lessons.

[00:00:15] Veronica Morgan: Evan's diverse career has taught him about long-term value creation in property. His [00:00:20] conversation should offer a unique lens on the future of housing in Australia, and we are keen to find out how Longview solutions to some of the market challenges have been performing.

[00:00:29]

[00:01:07] Veronica: Our guest today is Evan Thornley, co-founder [00:01:10] and CEO of Longview

[00:01:11] Veronica Morgan: Evan's background before joining the property industry includes co-founding a NASDAQ listed tech company and Australia's largest social [00:01:20] enterprise. He has brought his rare perspective on the intersection of innovation, investment, and social impact, and applied it to the problem of housing affordability.

[00:01:27] Veronica Morgan: Evan has spent the last eight years working from the [00:01:30] ground up to understand the realities of property ownership and management. Ultimately building long view into a leader in residential property buying and management.

[00:01:37] Veronica Morgan: Over the past years, they've created Buying Boost [00:01:40] Home Flex and Home Equity Investments as options for property ownership and ways in which to access equity in property. And we're really keen to find out how these programs are [00:01:50] traveling.

[00:01:50] Veronica Morgan: Great to see you today, Evan. It's good to see you again. I

[00:01:52] Evan Thornley: you both, Veronica and Chris. Yeah. Lovely. Thank you. I.

[00:01:55] Chris Bates: Evan, always enjoy our chats. And I remember our, one of our last chats where [00:02:00] you mentioned you were gonna launch these, I guess new approaches really to, residential property. A lot of people have been very, have tried and in the past to, to do investment property, sort of [00:02:10] residential funds and

[00:02:11] Chris Bates: a lot of them haven't survived or they haven't really got any cut through.

[00:02:14] Evan Thornley: not one. Truly. Yeah.

[00:02:17] Chris Bates: Well, there you go. So, and, and how's yours going? Because I mean, I [00:02:20] think it's any sort of new approach. We like to unpick it, and I'm sure you've got lots of learnings as the days tick along.

[00:02:25] Evan Thornley: Yeah, look, honestly,you've called it an interesting time 'cause things are just, starting to [00:02:30] rocket off the page. So it's pretty exciting for us. look, there's two sides to what we do, okay? So you create a fund by making that fund attractive to [00:02:40] investors to put their capital in, and then you deploy the capital from that fund.

[00:02:44] Evan Thornley: To clients for some type of housing solution. And so we're gonna create a number of different [00:02:50] investment structures and a number of different housing solutions on either side of the fund platform. so yeah, look, our fund is small at the moment, but growing incredibly [00:03:00] quickly.

[00:03:00] Evan Thornley: So we're about 30 million at the moment. That's double what it was six weeks ago. and, given the volume of investor interest, I suspect we'll be moving into the hundreds of millions, surprisingly [00:03:10] quickly. And then,we've co-invested with about a hundred families in their homes. mainly through home flex, which is more of an equity release version of the product, but also through buying Boost, helping [00:03:20] people, often young people, but by no means only young people, More equity to help 'em buy their home. and we seem to see a huge level of demand, out there. currently we're mainly focused on [00:03:30] home flex 'cause just moving really quickly and there seems to be a huge amount of demand there from people and not many other options. but we'll probably swing back onto doing more buying Boost.

[00:03:38] Evan Thornley: In, uh, time to come. There's a few [00:03:40] more friction points in that business system in terms of how you work with the banks in particular, which is much easier on the equity release side. But, anyway, I can unpack all that. But, we've got some [00:03:50] traction on both sides of that

[00:03:51] Evan Thornley: market. Now we've got people, really enjoying giving us money and we're giving them fantastic returns and we are really seeing a lot of interest in. Taking,use of our [00:04:00] products and, giving people access to home equity.

[00:04:02] Veronica Morgan: let's, I guess if we can look at 'em one at a time. Home Flex you said is the thing that's sort of going off at the moment.

[00:04:08] Veronica Morgan: So that's the product really [00:04:10] effectively. So somebody owns their own home, so they have to own it outright or they can just own a, a chunk of it. They get to access some of the equity in their home. And in order to do that, the forego. A portion of [00:04:20] their future capital growth. Is that, is that the way it

[00:04:22] Evan Thornley: that, that's exactly right. Look, I think what we've learned, out there is that precisely because Australia's such an incredible capital growth market, that means two [00:04:30] things. a huge number of Australians either have too little or too much home equity. If you're an early stage home buyer or an aspiring home buyer, it's so hard to get enough equity. [00:04:40] To get into the market. but for many homeowners, especially those who've owned their homes for, some number of decades, they've got quite a lot of wealth there and often not necessarily much wealth [00:04:50] elsewhere. but they can't access it, until they downsize. Typically, so Home Flex helps people access that home equity without having to sell their home, or not sell it yet.

[00:04:59] Evan Thornley: A lot of our clients [00:05:00] are what we'd call pre downsizes in their forties and fifties. most of them have a, an existing mortgage, but they're often two thirds, three quarters of the way through that mortgage. So, typical client will have maybe a [00:05:10] $2 million home and maybe 1.3, $1.5 million worth of equity.

[00:05:14] Evan Thornley: So they've got an existing mortgage. but they'd like to access some of that equity. So, you know, they've got a couple of choices. [00:05:20] Many of them, as you would know, Chris,they'll refi their mortgage and take another couple hundred in mortgage. But not everyone wants to increase their mortgage payments at this stage in their life.

[00:05:28] Evan Thornley: And particularly given what's happened with [00:05:30] rates lately, not everyone can, they might be small business owners or others for whom it would be more trouble and it was worth to try and refi their mortgage. we have some other people later in life who, [00:05:40] may be looking at a reverse mortgage as an alternative way to do that.

[00:05:43] Evan Thornley: There are quite strict rules of eligibility for that. So a large number of people, or even consider that option simply, [00:05:50] it's not available to them. but we don't have any of those eligibility issues so that they're all coming to us. and even people who can get a reverse mortgage, a lot of those people are. Worried about the risk of having [00:06:00] this compounding bill that if their house doesn't keep growing in value as fast as the reverse mortgage is compounding, then that potentially puts 'em in a dangerous position a vulnerable time [00:06:10] later in life. and our product just doesn't work that way. So we can never put them in that sort of risk.

[00:06:14] Evan Thornley: So there seems to be just a wide range of people who are keen to get their home equity and, they're starting to come to us [00:06:20] for home flex to do it.

[00:06:20] Veronica Morgan: I would imagine though that if it wasn't gonna grow much in value, it wouldn't be a great investment for your investors. so how do you decide on the home flex side of things, how [00:06:30] do you work out whether it's an asset you want to take a chunk of.

[00:06:32] Evan Thornley: Yeah, look, having a predictive view about future capital growth is obviously the fundamental problem that we are trying to solve, is [00:06:40] surprising to me is that nobody else seems to wanna solve that problem because best as I can ascertain, that's probably the single most valuable problem to solve because, capital growth in Australian [00:06:50] houses is the single biggest wealth generation engine in the entire nation.

[00:06:54] Evan Thornley: And so you would think there'd be a lot of companies out, there trying to work out how to do that. And I don't know any apart from us, so [00:07:00] that's weird to me.

[00:07:01] Veronica Morgan: over the years I've sort of come across a number of players who all would like to, but they've realized that it's far too, you know, the error rates are far too high, so [00:07:10] they wind it back to go look. The most I'm prepared to say is two years, but even that's a bit risky. So,

[00:07:14] Evan Thornley: Yeah. And, and look, there's a look,

[00:07:16] Veronica Morgan: there's a bunch of players and a bunch of, property investment and property. [00:07:20] Buying and investment companies out there that, that use a little bit of data science mainly to predict short term capital growth. and you know, that's a pretty established model.

[00:07:26] Evan Thornley: There's five or six sort of rec dual or semi reputable players [00:07:30] out there that will help you pick typically a location that, a sort of suburb cycle analysis tells you on a reversion to mean basis. Probably doing. Unusually well in the next few years, [00:07:40] buy into that area. if you're a highly geared property investor and you go in with 10% or 20% equity and the thing's gonna jump 10 or 15% in the next year or so, then get more [00:07:50] equity and lever up and go buy another one.

[00:07:51] Evan Thornley: I, I get that play that's. Really nothing to do with what we are doing. we are interested in homes that are gonna have enduring, capital growth over a sustained period. we're [00:08:00] not flippers. and we're not levered at all. We have no borrowings at all. So we're at pure play in capital growth.

[00:08:05] Evan Thornley: And so predicting medium and long-term capital growth is much more complex than that. [00:08:10] about this. For literally days on end, probably underwater. But,just to break it down very simply, From what we've learned the last four or five years, and you know, our teams tried to analyze every [00:08:20] sale price, every individual property in the country for 50 years.

[00:08:23] Evan Thornley: And, our buyer's advisors like all good buyers advisors, Veronica as you know, had bought, thousands of homes and bring just deep, field [00:08:30] experience. so the two components to what drives capital growth for the individual property, most people think it's all about the area that you're in and are you in a hot suburb or not?

[00:08:38] Evan Thornley: And yet that matters, about a [00:08:40] third of the capital growth potential of an individual property is mainly driven by the area it's in. But how do you define that? Is that a suburb? Is it a census collection district? Is it a local government area? Is [00:08:50] it, The northern suburbs of Adelaide for the last few years, well, what area, how do you think about that?

[00:08:54] Evan Thornley: And over what period? But all of those

[00:08:56] Evan Thornley: factors are roughly one third of what drives capital growth. [00:09:00] Two thirds is actually driven by the characteristics of the individual property, which could be different to the one right next door to it, and the dominant factor in that it's not rocket science, and you guys both know [00:09:10] this.

[00:09:10] Evan Thornley: Let's just start with what proportion of the value of the home is actually the value of the dirt underneath the home. Land appreciates, buildings, depreciate,all other things being equal and they're not. The [00:09:20] quality of the location is hugely variable in this, but all other things being equal a property where 80 or more percent of the value is actually the value of the land underneath the home.

[00:09:29] Evan Thornley: That [00:09:30] 80% is going to go up rapidly. The building is gonna be depreciating. So land value proportion is the single biggest predictive variable. And so that's,considerable portion of what we [00:09:40] do is estimating land value proportion and then looking at, the quality of the location. usually more the micro location and other characteristics that might impact that, a [00:09:50] bit more.

[00:09:50] Evan Thornley: But,

[00:09:50] Evan Thornley: I like to say we invest in dirt disguised as houses,

[00:09:53] Veronica Morgan: you could argue though that the land value is, deeply tied to location, you know, because the same size

[00:09:59] Evan Thornley: [00:10:00] absolutely.

[00:10:00] Evan Thornley: Yeah, now, no, no, no. It's, and that's I, you may have heard our phrase, what do we invest in? We invest in rot Wells,

[00:10:07] Evan Thornley: robust, older dwellings on well located [00:10:10] land. So the well located part is important. but how one understands what we're located is, I think is part of, what you were talking about.

[00:10:17] Evan Thornley: And we had a spread in the fin. Monday a week ago where [00:10:20] we showed some 25 year capital growth charts, which were counterintuitive I think, to many people even, and including, serious, experienced professionals in our industry. [00:10:30] particularly the Melbourne chart, I think was the most.

[00:10:31] Evan Thornley: Striking one to me where really the inner leafy greens pretty consistently underperformed the city as a whole. And I don't know anyone who lives in [00:10:40] those leafy inner greens who would believe that to be true. They all think that they get the best capital growth, and they've all had good capital growth.

[00:10:45] Evan Thornley: It just turns out that others have had better. so, you know, well [00:10:50] located is not just how approximate are you to the CBD.

[00:10:53] Veronica Morgan: How are you measuring that capital growth though? Because, there's so many things that can mask it. Like, if you're in an area, for example, where there's [00:11:00] been a lot of renovations over a period of time, well that's built into the capital growth rate, and it's not technically capital growth, it's manufactured growth.

[00:11:07] Veronica Morgan: and also rezoning, you know, if you're in a, in [00:11:10] a middle wing suburb, for example, where there's a rezoning. One house gets sold as a house and the next time it gets sold as a development side. it's had that big uplift from that one [00:11:20] rezoning change and that factors into capital growth rates and then that gets mixed in with all the data as well.

[00:11:25] Veronica Morgan: so there's sometimes you've gotta be able to look at that and think, well, hang on a minute, there's been [00:11:30] some bigger things at play here and it's not necessarily the case.

[00:11:34] Evan Thornley: Oh, absolutely. And we have our data science team seven years into this. So we think about all of those [00:11:40] issues. We scrub the data, you know, look,if you look at a bracket, what I call a bracket, so between this sale and that sale, right? maybe the thing was sold in 1993 and then sold again in 1998.[00:11:50]

[00:11:50] Evan Thornley: And over that period,the thing, did 15% compound annual growth? 15 really? That looks like a reno, right? and you know what the telltale sign is? If you [00:12:00] have one period of unusually high growth, including unusually high versus adjacent properties and the area, and then it has unusually low growth after that.

[00:12:08] Evan Thornley: Well, that's a dead giveaway. [00:12:10] That's a reno, right? Somebody's pumped capital into it. We just pump the price up. But then that Reno is depreciating more rapidly and you're not getting the real underlying land value doing the heavy work for you. [00:12:20] And so you'll underperform in the next bracket While that.

[00:12:22] Evan Thornley: gag in our kitchen is gradually depreciating itself. So, you know, you can start seeing patterns in the data that help you identify [00:12:30] precisely issues. like that rezoning obviously is a huge source of capital growth, but it's real, and, buying the path of progress that matters.

[00:12:36] Evan Thornley: A lot of the reason why the middle ring in Melbourne, for example, has largely [00:12:40] outperformed the inner ring is 'cause the development wave went out over the last 15 years, So Glen Waverley outperformed Brighton, principally because quarter acre lots got knocked over into townhouses and [00:12:50] bill units.

[00:12:50] Evan Thornley: but that was real capital growth for the people who owned those homes. but it's a once off,

[00:12:54] Veronica Morgan: and then, developers then use that to, promote, well, you should buy their townhouse, which is on

[00:12:58] Evan Thornley: Which of course is complain bollocks, [00:13:00] right? Because they're exactly the opposite, right? But land has had most of its growth, and now they're gonna stick a large dense building on the thing which is gonna depreciate. you know, you're, you're an incredible professional and you [00:13:10] know,all these factors and I guess, data science work as well as.

[00:13:13] Evan Thornley: Our individual advisors. we think all that through. as investors in these homes, we look at every home [00:13:20] one by one. We look at everything. The data science tells us about that home, about that area, and then one of our buying advisors goes out and has a really good look at the property and thinks about all the things that may impact it in the [00:13:30] future that might have impacted in the past.

[00:13:32] Evan Thornley: every single property that we invest in goes through that process very rigorously, then goes to our investment committee every Friday morning. We debate every [00:13:40] single one of 'em for 30, 45 minutes. it's an intensive process. and I didn't know really how well we were doing.

[00:13:46] Evan Thornley: I felt like we were making good decisions every Friday morning, but we are [00:13:50] now long enough into the process. We're about 18 months in. We're starting to see. how our properties are performing,and blow me down if they aren't doing really well. and look, [00:14:00] our basic target we set ourselves was just to make sure we're investing in the top half

[00:14:05] Evan Thornley: of the distribution of capital growth,

[00:14:07] Evan Thornley: Right.

[00:14:07] Evan Thornley: mainly in the detached home sector. Not [00:14:10] exclusively, but mainly. So, if you could consistently invest just in the top half. Then obviously your average performance is gonna be probably closer to the top quartile. and if the average long term [00:14:20] is, 7.2% and detached house index, so doubling every 10 years, and you are gonna do considerably better than that.

[00:14:26] Evan Thornley: Then, you're gonna be pretty happy with that underlying growth. And I think [00:14:30] we're just getting enough duration,in our results now that, I think we can start saying with increasing confidence, we appear to be doing that.

[00:14:38] Evan Thornley: We appear

[00:14:39] Evan Thornley: to be [00:14:40] investing somewhere on average in the sort of 75th to 80th percentile,in the market.

[00:14:44] Evan Thornley: And that's a considerable. Improvement on the average. And so the value of the rod [00:14:50] Wells that we invest in is indeed significantly outperforming the general detached house price index, let alone the. Blended dwelling index, which has apartments and stuff that [00:15:00] obviously bring down the average. so we're shooting the lights out to be candid in terms of, the quality of the assets that we've invested in.

[00:15:05] Evan Thornley: and then our unique structure with a, you disproportionate share of the capital [00:15:10] growth in exchange for the, capital that we give the client means we have a leverage effectively on the underlying level of growth. And

[00:15:17] Evan Thornley: we

[00:15:17] Evan Thornley: told our investors that we were pretty confident we could [00:15:20] deliver them roughly double the house price index.

[00:15:22] Evan Thornley: So if houses go up 7%, we should be able to deliver you about a 14% return, your money over a period of time. And at least, [00:15:30] in recent times as we started to have enough data to give some data, we did 4.5% in the first quarter. I just released our second quarter at 5.16% for the [00:15:40] quarter.

[00:15:40] Evan Thornley: So it looks like we'll probably end up delivering our investors somewhere north of 20% this calendar. The year in what's still a below average market so far below, we'll probably pick up in [00:15:50] the second half. So

[00:15:50] Evan Thornley: we've surprised ourselves on how well that's gone.

[00:15:53] Veronica Morgan: So are you tracking that via valuations,

[00:15:56] Evan Thornley: look. it's, you know, you'll understand. I mean, our team [00:16:00] revalues every property every quarter. then we get independent valuers to do a random sample of that portfolio just to check our homework and make sure we're not, mark and our homework wrong.

[00:16:08] Evan Thornley: we've been spot on with the [00:16:10] independent valuers. they pick a random sample, they do that last quarter. We said, look, just to make sure you didn't actually pick the three top performing. Properties in our portfolio. So why don't you value them as well, just to make sure [00:16:20] we aren't giving ourselves a favor. Checked some extra ones and we were pretty much dead on. And now we've just had the first two sales from our portfolio, both of which ended up selling in

[00:16:29] Evan Thornley: [00:16:30] market at greater than what we had 'em in the book force. so you know, I think we're pretty confident, I mean, you guys know, established homes and established suburbs, unless they're a very unusual, you've got a pretty good [00:16:40] idea what that thing's worth at any given point in the market, plus or minus a couple of percent.

[00:16:43] Evan Thornley: And certainly across a portfolio of a hundred, I think know, we're probably a little bit conservative in our valuations, just to make sure [00:16:50] that we're not overstating things. And, if, as clients gradually sell those properties and they continue to do so above the valuations that we had, then I think our investors will have more and more confidence [00:17:00] that what we've told 'em is going on in the portfolio is indeed going on.

[00:17:03] Chris Bates: And, right now, that appears to put our returns in the low twenties, I mean, it's a really, um, interesting business, right? Tell me if I've [00:17:10] got

[00:17:10] Chris Bates: this, grasping this wrong. Right? I mean, there's 11 million dwellings, right? A lot

[00:17:13] Chris Bates: of those have got houses paid off. A lot of them have got quite low debt. some of those people are doing well financially and some aren't, right.

[00:17:19] Evan Thornley: [00:17:20] Yep. Yeah, totally.

[00:17:20] Chris Bates: for cash and a lot of your investors are gonna be in that same cohort, right? They're probably gonna be the, I imagine, a bit on the older. Age. they've got money in super, they've got other [00:17:30] assets, they've got investment properties. They're just looking at alternative investment strategies.

[00:17:33] Chris Bates: Right. and How can I get a better return than putting in the bank or

[00:17:36] Chris Bates: buying of

[00:17:37] Chris Bates: shares, et cetera. Right. so you're basically taking money from the people who have [00:17:40] money, at the older age, right. They've gotta put the money somewhere. And you're lending it in some sense to the

[00:17:45] Evan Thornley: To their next door neighbors who have a bit less. Yeah, I mean, and honestly, that's often the case, right? I mean, [00:17:50] literally you might have two 50 year olds living next door to each other in the street. That's sort of the metaphor of where we are, as you say, Chris, they're probably live, been often in similar homes.

[00:17:58] Evan Thornley: One of 'em happens to have done well [00:18:00] and happens to have other things going on and has, you know, a mill or two that they're trying to invest in. Often in other investment properties,or other asset classes, and then literally next door to them. And [00:18:10] they're often a bit embarrassed and ashamed about it 'cause they say good day to each other every morning, but they don't want the neighbor to know that actually they're struggling a bit, even though they've got plenty of equity in their homes.

[00:18:19] Evan Thornley: [00:18:20] or, you know, they just can't do the things that they want to do. they can't be the bank mom and dad for their kids, or they can't do that renovation, or they wanna invest in their small business and they just, you know, the easiest thing to do would be grab a couple of hundred grand [00:18:30] of their equity and do it.

[00:18:30] Evan Thornley: you know, we're certainly not trying to be a, uh, kind

[00:18:33] Chris Bates: No, no, no, I'm not, yeah.

[00:18:34] Evan Thornley: wheel a peer pro process 'cause we're not, but, we're a two-sided platform,

[00:18:38] Chris Bates: and,

[00:18:38] Chris Bates: and there's a genuine

[00:18:39] Chris Bates: need, right? [00:18:40] There's a Genuine need for an investment return on one side, and there's a

[00:18:42] Chris Bates: genuine need for

[00:18:43] Chris Bates: accessing cash because they're

[00:18:45] Chris Bates: going, well, my alternative

[00:18:47] Chris Bates: is a bigger mortgage, which I probably can't get [00:18:50] or I don't

[00:18:50] Evan Thornley: Well, don't want, don't want often, yeah.

[00:18:53] Chris Bates: but I do wanna stay in the home and,

[00:18:55] Chris Bates: you know, my

[00:18:55] Evan Thornley: this for a while, five or six years till the kids graduate, or till you retire [00:19:00] or till,

[00:19:00] Evan Thornley: mom passes away and you don't need to be close by or whatever reason it might be that. So most of our clients are what I call pre downsizes.

[00:19:07] Chris Bates: Yeah, that's right.

[00:19:08] Chris Bates: they might have grandkids and they

[00:19:09] Chris Bates: want to come there for [00:19:10] Christmases, and so staying in the home is a

[00:19:11] Chris Bates: priority, right

[00:19:12] Chris Bates: And

[00:19:12] Chris Bates: So

[00:19:13] Chris Bates: they go. well,

[00:19:14] Chris Bates: we want to continue living we want to keep paying The bills, wanna help the kids out, or go on holidays, et cetera, I need [00:19:20] cash. This gives them the ability to stay in their home. And so what they're giving up is a bit of the growth,

[00:19:24] Chris Bates: which

[00:19:25] Chris Bates: their alternative selling the property anyway, right?

[00:19:27] Evan Thornley: And usually moving into a low growth property like a [00:19:30] downsizer apartment. Right. So if they wanna stay on the capital growth train.

[00:19:34] Evan Thornley: This allows 'em to stay on it and usually get at least, typically two thirds of that, still going to them. [00:19:40] So two thirds of the capital growth on a rodwell is much better than a hundred percent of the capital growth on a luxury downsizer apartment.

[00:19:46] Evan Thornley: That's for damn sure. So,

[00:19:47] Chris Bates: Yeah, so I'm with you. So then the, this family, [00:19:50] for example, they're staying in the home. They give up a third of the growth, let's just call it. Right? which they still get two thirds in their pocket. They live there, they get all lifestyle benefits. They get access to some cash, what they need to, keep [00:20:00] living in this property, but you don't just take every

[00:20:01] Chris Bates: property.

[00:20:02] Chris Bates: Right? So if I came to you and

[00:20:03] Chris Bates: I've say I've got a busy.

[00:20:04] Chris Bates: road in a bad location, you would say, look, we're not gonna invest in this 'cause we're not gonna get our investors a good enough [00:20:10] capital growth. Right. So You are very selective,

[00:20:11] Chris Bates: on the properties

[00:20:13] Evan Thornley: We, yeah. Although that won't necessarily rule out the busy road,

[00:20:16] Evan Thornley: interestingly enough, right? Uh, Yeah. And look, you know, so we've built, our [00:20:20] own platform that,in real time now you can type in an address and we'll do, I guess what would be the equivalent of a bank pre-approval.

[00:20:27] Evan Thornley: Can't guarantee that we'll invest in your home, but [00:20:30] we can very quickly say if we definitely wouldn't. So we don't waste your time or our time, or if we're working with a broker or some other service provider, don't waste anyone's time give you a [00:20:40] quick no. of all the assets people are brought to us, we've only invested in 12%.

[00:20:44] Evan Thornley: So we, we are selective.

[00:20:45] Evan Thornley: but that's partly the, a lot of geographies that, we're really only in only. [00:20:50] 70% of the asset value in the country, but we are in greater metro areas of Sydney, Melbourne, and Southeast Queensland. So we're

[00:20:56] Evan Thornley: not currently outside, and I don't think we're going to go outside [00:21:00] those areas for the foreseeable future.

[00:21:01] Evan Thornley: that's the vast majority of the market. And we are money weighted across the three markets, so they offset each other reasonably well over the cycle. So we're well [00:21:10] diversified both between markets and within markets. that's working great.

[00:21:13] Chris Bates: So, I mean,

[00:21:14] Chris Bates: the irony of this is it actually helps you because what, you'll find is that you'll feed lower supply. I mean, let's [00:21:20] say, I mean this stage, you're not making a movement on the market right. The size of your funds. a, a

[00:21:23] Chris Bates: drop

[00:21:23] Evan Thornley: an $11 trillion asset class. Yeah, no, no one moves an $11 trillion asset class. No

[00:21:28] Chris Bates: yeah. Unless you're, uh, you know, [00:21:30] 20 buys days buying the same postcode.

[00:21:32] Chris Bates: But, um,

[00:21:32] Evan Thornley: uh uh. Not that that would ever happen in Toowoomba or the northern suburbs of Adelaide to take a random example, but yes indeed.

[00:21:38] Chris Bates: and that means you, 'cause [00:21:40] naturally, let's say this fund did get a lot of momentum, right? You would find that people are less likely to sell their houses right, in these

[00:21:45] Chris Bates: suburbs that you're buying because they're living in 'em longer.

[00:21:47] Chris Bates: It's gonna create tighter of supply, and then that's [00:21:50] obviously good for you because there's tighter of supply.

[00:21:53] Evan Thornley: yeah, look, that, I don't think that's really a dynamic for us. I think people, you know, in every suburban sales [00:22:00] agent will tell you the reasons why people sell home and move home. you know, the reverse mortgage folks are often, their value proposition is stay forever in your home.

[00:22:08] Evan Thornley: We'll let you do it right. That's not [00:22:10] really our proposition. Our proposition is more do the things that you want it to do now, rather than wait till you

[00:22:16] Evan Thornley: downsize

[00:22:17] Evan Thornley: get the

[00:22:17] Evan Thornley: money out, then it's real. We're just trying to separate a [00:22:20] portion of the dividend, the downsize of dividend, and giving it to you now.

[00:22:24] Evan Thornley: that means you don't have to do the

[00:22:25] Evan Thornley: downsizing yet. I mean, that's most of our clients. so look, someone's gonna stay [00:22:30] 30 years and that's fine. but most of them are gonna stay five to seven years and then they'll get the rest of their downsize a dividend then.

[00:22:36] Evan Thornley: And you see our advertising, our goal is not to say stay longer in your home. Our [00:22:40] goal is to say, do those things you want to do now that you can't do.

[00:22:42] Chris Bates: Yep. Because you need a turnover of cash, right? the investors don't wanna leave that money tied up

[00:22:46] Chris Bates: for 30 years.

[00:22:46] Evan Thornley: there, there'll be a lot of churn in our portfolio and, andboth [00:22:50] because people sell the home now that they're ready to downsize and some of them are doing that already in the first 18 months. but also people can buy at our contract at any time. So you take my money, you invest it in your small [00:23:00] business, that goes great and you go Look, thanks Evan, but I'll buy 'em a capital growth back now.

[00:23:04] Evan Thornley: Thanks. 'cause my heads are still going well and,I'd rather not give it an ongoing third of it to you guys and we look great. [00:23:10] Do that. and so between the sales of the homes and the contract buyouts, it looks pretty likely that about 15% of our portfolio will churn every [00:23:20] year after about year three.

[00:23:21] Speaker 2: So that's actually a high cash flow. it's counterintuitive, I think to most people. It's actually a high cash flow,proposition for the investor, which is surprising, I [00:23:30] think, to a lot of people. I'm on a personal mission to help more people make better property decisions. You know, most people don't realize that they can cost themselves hundreds of thousands of dollars over the medium to [00:23:40] long term when they make property decisions without all of the information that they need. And what I do is help people with tricky real estate problems, which offer masqueraders simple questions [00:23:50] like, should I sell my investment property because the interest re payments are hurting, or should I buy before I sell?

[00:23:56] Speaker 2: Or the other way around. You could connect with me and access all of the tools that [00:24:00] I've created to help you make better property decisions at Veronica Morgan dot com au. And there you'll find resources for first home buyers, details about my buyer's agent mentoring [00:24:10] program. You could connect with my Sydney based property management and buyer's agency teams, Australia wide vendor advocacy.

[00:24:16] Speaker 2: Or ask me for introduction to the small group of buyer agents [00:24:20] that I would personally recommend across the country. That's Veronica Morgan dot com au. If you're considering a property moose, which is buying your first time, upgrading, renovating, or [00:24:30] investing, the team here at Alcove would love to help you think through your decision and get the finance right.

[00:24:35] Speaker 3: Please go to cove.com au to reach out.

[00:24:38] Veronica Morgan: Yeah. I would've imagined it was [00:24:40] definitely somewhere to park your money and,

[00:24:41] Evan Thornley: And, and

[00:24:41] Evan Thornley: you can, and go around again. But if you, if you actually just want it thrown off cash to you as the portfolio churns, then you can take the money,

[00:24:49] Veronica Morgan: So [00:24:50] interesting. And I guess you don't really have an obligation towards the person taking the money so that the homeowner, I mean, they may not be able to afford the downsize that they want to downsize [00:25:00] if they do this. they might actually hamstring them in the future, but I guess that's not really your issue.

[00:25:04] Veronica Morgan: Is it

[00:25:04] Evan Thornley: Oh,

[00:25:05] Evan Thornley: look, they've gotta check?

[00:25:06] Evan Thornley: I mean, of course that's right. But I mean, let's take the typical example I [00:25:10] gave before, someone who's got a million and a half in equity and a $2 million home. and,it's gonna be a $4 million home 10 years from now. or maybe it's 3.2. Five or six years from now when they sell.

[00:25:19] Evan Thornley: [00:25:20] okay, so they gave up 400 grand of that 1.2 million in growth, but the rest is theirs. They, they're gonna be a pretty good place to downsize. Right? I think it'd be a rare situation where it's us that has put them in a bad [00:25:30] situation. We're try and do the opposite that's where the sell activity on our part is obviously, mainly firstly.

[00:25:36] Evan Thornley: We want to deliver a great return to our investors, but to be honest, [00:25:40] we only really want to do business where we're also letting the client always get a good outcome. and this, I think is the fundamental difference between what we do and every other [00:25:50] deposit gap, reverse mortgage equity release product out there.

[00:25:54] Evan Thornley: people always say to me, what's different about you guys? And I say, well, it's not that complicated. They're all bankers and we're property [00:26:00] investors. and bankers have one view of the world, right? You do the work and you give us the money, And as property investors, I say the dirt does the work, the dirt does the work.

[00:26:09] Evan Thornley: Neither you nor I [00:26:10] have to do the work. The dirt does the work. And we're only doing this deal if the dirt is gonna do the work for both of us. And if the dirt does the work, we can share the proceeds between us and we're both gonna be happy with the results. [00:26:20] So I own want to do business. Clients, I'm sorry to say, where their dirt is gonna do the work for both of us.

[00:26:26] Evan Thornley: So I know the client's gonna get a good result and I know we are gonna get a good result. [00:26:30] and there's, it's a victimless crime because the dirt's doing the work

[00:26:33] Veronica Morgan: where they bought

[00:26:34] Evan Thornley: investors right.

[00:26:36] Veronica Morgan: and I guess it differs from that sort of fractional investing model, you know,[00:26:40] brick X that didn't survive anyway, where people were buying a share in a particular asset. You basically got a whole pool

[00:26:46] Evan Thornley: No, I mean, we like rule number one, diversification, right? I [00:26:50] mean, we are in a hundred properties. the lowest. Value of which is 700 grand, which is gonna be absolute Monty, by the way. I can't wait to see how that goes. The biggest one's a $6.2 million pile on the [00:27:00] waterfront in Gladesville.

[00:27:00] Evan Thornley: we are in, you know, a hundred properties in probably 87, 88 suburbs. We've got a few, we might have a couple in Kellyville I think, or a few other places where we've got two rather [00:27:10] one, so we are diversified. Between those three markets, within those three markets. you look at the map of where our properties are, they're, all over the map, but each one individually [00:27:20] selected,very happily.

[00:27:21] Evan Thornley: The 171 activities zones in New South Wales just got declared. And surprise, surprise, while we had no insight information, 19% of our [00:27:30] portfolio in New South Wales are inside those zones. Because No kidding. We were trying to buy good locations and similar with the Victorian Activity Zone.

[00:27:36] Evan Thornley: but really,we are always happy when an individual [00:27:40] property does even better than we thought. But the real point is if we're really diversified, our mechanism is so powerful because of the sort of implied leverage. Our job from there is actually [00:27:50] not to try and be too clever, but to take out risk, Make sure everything now has the lowest risk and the lowest volatility. 'cause the returns are gonna be just fine. you know, we are not trying to pick between Sydney, Melbourne, and Brisbane. [00:28:00] Everybody's, every one of us has got a theory about, Melbourne's a basket case, or Brisbane's got the Olympics, or Melbourne's gonna outperform.

[00:28:06] Evan Thornley: Now at the bottom of the cycle, everyone's got a theory. I can see different [00:28:10] patterns in the data and I've got all sorts of ideas and they're probably more sophisticated and well informed than most people. But I'm not trying to be that smart

[00:28:16] Veronica Morgan: Yeah. Well, I mean it's, it's huge risk trying to pull, make [00:28:20] one call and

[00:28:20] Evan Thornley: so let's just ask, okay, what's the money weighted distribution across the three markets?

[00:28:25] Evan Thornley: 47 percent's in Sydney. 31 percent's in Melbourne. 18 percent's in Brisbane. Okay. [00:28:30] So our portfolio is gonna be 47% in Sydney, 31% in Melbourne, 18% in Brisbane. we're not trying to be smarter than that. We don't need to be. and if you backtest that [00:28:40] distribution over 50 years, you'll see remarkably low volatility and very steady good results.

[00:28:45] Evan Thornley: So.

[00:28:46] Veronica Morgan: when we spoke to you first time. Couple of years ago now, I think,you were looking [00:28:50] at fund for investing in these rod walls, as a way of almost like land banking. You were talking about looking at

[00:28:56] Evan Thornley: Oh yeah.

[00:28:57] Veronica Morgan: ring and buying properties that [00:29:00] long

[00:29:00] Evan Thornley: hmm.

[00:29:00] Veronica Morgan: you'd have a

[00:29:01] Veronica Morgan: sort

[00:29:01] Evan Thornley: that, that's, that's still the next fund. So, you know, let me get this one to a couple of hundred million and milling fast. And then we've done two thirds of the work to [00:29:10] then launch a different model, which, which will be, I guess a buy to rent to, Paraphrase, a vastly overused in even more over-hyped, proposition.

[00:29:18] Evan Thornley: But,yeah, so the, and that, that's a [00:29:20] different model. It has a different structure and a different mechanism. its returns won't be quite as strong as this, but I think we'll be able to get like 12% returns there unlevered. So that's very solid. But they will [00:29:30] own those properties, so.

[00:29:31] Evan Thornley: We'll have complete control over them.

[00:29:32] Evan Thornley: So, so that's a, that's a different one. We haven't launched that one yet. and that one's got really powerful social purpose because we'll be, renting them out through the [00:29:40] affordable housing regimes. and we have a partnership that we are building with the Council for single mothers and their children.

[00:29:45] Evan Thornley: so most of our. Clients will be working sole parents and their kids. and we'll give [00:29:50] them good, solid, secure, long-term tenancy in a well-maintained home energy retrofitted at a discount to market rent. And again, the dirt will do all the work. [00:30:00] We will make all the money outta the dirt and we'll actually be able to give subsidized rent, in that situation to the people that most need it, which is particular passion of mine, given my personal history.

[00:30:09] Evan Thornley: [00:30:10] But, uh, you know, there's a million soul parents and they. 2 million kids in this country and, housing's one of the things that makes their lives incredibly difficult.

[00:30:17] Chris Bates: Yeah, absolutely. What were some of the challenges in [00:30:20] setting up these funds? you know, from a financial advice background, I'm thinking tax, I'm thinking, getting a funds approved, some of the things

[00:30:26] Evan Thornley: There's a lot of moving parts, mate. and the, the fund [00:30:30] structuring and the legal structuring, the financial engineering, it's like you're dealing with a balloon every time you squeeze in one thing, it pops out the other side. you know, to be candid, I mean we, we've invested about $10 [00:30:40] million over the last five years building this platform on whether it's the tech and data science or whether it's quite a. complex set of legal structures, regulatory approvals from ASIC [00:30:50] and, a fsls and ACLS and all those intersecting parts. and each part has an impact on the other parts. The tax

[00:30:56] Evan Thornley: issues

[00:30:57] Evan Thornley: are complex for the investors. you need to make sure you [00:31:00] don't create tax issues for your clients.

[00:31:01] Chris Bates: a lot of moving parts behind the scenes there. and we've done it in a blue chip way with top tier, firms giving. Really considered [00:31:10] advice. but we wanted to build a platform that was bulletproof, that was, compliant and proper and ethical and robust and could scale to, Yeah,

[00:31:18] Evan Thornley: hundreds of millions and billions [00:31:20] of dollars and thousands of homes.

[00:31:21] Evan Thornley: it was worth the investment.

[00:31:23] Chris Bates: so the homeowner, right? Let's say I've got your, do those examples you're talking about, right? Got a house with two mill

[00:31:27] Chris Bates: and they give up a third of the equity. They sell it [00:31:30] one day for

[00:31:30] Chris Bates: three

[00:31:31] Evan Thornley: of the capital growth, not a third of the equity.

[00:31:32] Chris Bates: Yeah. No. F

[00:31:33] Evan Thornley: Big difference.

[00:31:34] Chris Bates: yep. Yep.

[00:31:35] Evan Thornley: No, it's very important. Right.

[00:31:36] Chris Bates: No, no, no. Absolutely.

[00:31:37] Evan Thornley: of the upside. Yeah.

[00:31:38] Chris Bates: Yeah, exactly. Yeah. So [00:31:40] the, yeah, the two mil, let's just do round numbers easier.

[00:31:42] Evan Thornley: Like you said, 3.2, they give you 400 grand of that, a third of the growth. Right. the original capital back.

[00:31:48] Chris Bates: yeah. plus the capital, right? So

[00:31:49] Chris Bates: they, [00:31:50] and you gave them, what, 200 grand or something? so they give you 600 back. and they haven't paid any tax on that, right? Because it's all been on their home.

[00:31:56] Chris Bates: Right. So they've got an asset growing tax free. It stays in their name. So

[00:31:59] Evan Thornley: yeah, funnily [00:32:00] enough, no one's paying any land tax in this model.

[00:32:02] Chris Bates: Yeah, all capital

[00:32:03] Evan Thornley: you guys know

[00:32:04] Evan Thornley: that, we've got a rental property management business.

[00:32:06] Evan Thornley: Proud to say, I think we're one of the best customer service property [00:32:10] management businesses in the country with,

[00:32:11] Evan Thornley: NPS scores, about 80 points above the industry average. we're very proud of that, but we know as therefore, as well as anyone in the country, what a shit deal it [00:32:20] is to be a landlord, right? and how hard it is to make a decent return. How much those costs, taxes, hassles, unexpected surprises, negative cash flows. I

[00:32:29] Evan Thornley: [00:32:30] just don't

[00:32:30] Evan Thornley: think it's a very good way to invest in property.

[00:32:32] Evan Thornley: and so the whole swing thought behind what we were doing from a property investment point of view was the only reason to [00:32:40] invest in resi property in this

[00:32:41] Evan Thornley: country. which is close to the best capital growth market in the world, and therefore the worst rental yield market is to be investing for capital growth.

[00:32:47] Evan Thornley: The only thing you want is capital growth. [00:32:50] So how do we give people access to that capital growth or even that capital growth on steroids, which our model

[00:32:55] Evan Thornley: does. And none of all the other

[00:32:57] Evan Thornley: stuff.

[00:32:57] Evan Thornley: none of the other costs, none of the other taxes, [00:33:00] none of the other hassles, nothing. And We think that

[00:33:02] Evan Thornley: this is a

[00:33:03] Evan Thornley: killer proposition for the two and a half million landlords and $2.2 trillion that's currently invested in the [00:33:10] asset class.

[00:33:10] Evan Thornley: Most of it badly. And sure enough, quite a lot of our

[00:33:13] Chris Bates: investors are, uh, landlords who are gradually saying that, hang on a minute, I'm gonna get two to three times my [00:33:20] return. Diversification, strong cash flows, and none of the hassles of being a landlord. That always seems too good to be triggered, right? I mean, where do you see this getting to in terms of like size? Do you see this to, [00:33:30] multi-billions you think you can sort

[00:33:31] Chris Bates: of

[00:33:31] Chris Bates: get to? Yeah,

[00:33:32] Evan Thornley: I do. Yeah. look, I have absolutely no doubt that there's multiple billions of capital out there that would love this, level [00:33:40] of returns with such a stark. Low risk stack, right? I mean, you know, as I'm talking to big family offices and, there's people putting millions of dollars in now into the fund from, larger families and [00:33:50] other

[00:33:50] Evan Thornley: investors, I'm like, okay, where else are you gonna get mid-teens returns, right?

[00:33:54] Evan Thornley: Global equities, private credit.

[00:33:56] Evan Thornley: What's, your risk stack there? Right? You've got someone who's getting up at three in the morning and [00:34:00] those funds making sure they found out what Donald Trump said and what happened on Wall Street, and whether the Ukraine's blowing itself to bits, I've got somebody that gets up at three in the morning too.

[00:34:07] Evan Thornley: You know what they do?

[00:34:08] Evan Thornley: They

[00:34:08] Evan Thornley: check the grass is still growing, the [00:34:10] owners is still asleep, and then they go back to bed. Right? That's my risk stack, right? And if I can deliver your midterms returns on that risk stack,

[00:34:17] Evan Thornley: then that looks a

[00:34:18] Chris Bates: whole lot better than, you [00:34:20] know, every day that the fin reviews full of stories about private credit deals falling over and Yeah. oh, we've got a first mortgage.

[00:34:26] Evan Thornley: Everything's great. Okay, so you've got a first mortgage on a hole in the ground with a bit of concrete. [00:34:30] and the CFME on strike outside, like that's a different risk stack. I don't have construction risk, I don't have market risk, I don't have financing risk. I've got no leverage, so I can't, nothing can go wrong for [00:34:40] me.

[00:34:40] Evan Thornley: there're established homes, there's just not a lot. That goes on here. So,we feel that the two groups of investors that

[00:34:47] Evan Thornley: seem to be

[00:34:47] Evan Thornley: charging at us

[00:34:48] Evan Thornley: are people who [00:34:50] otherwise wanna invest in resi property and their other choices being a landlord. And this is a total no brainer for them, or people who are building a diverse portfolio of assets from,

[00:34:58] Evan Thornley: cash

[00:34:58] Evan Thornley: and fixed income at the [00:35:00] defensive end to, PE and VC and crypto at the risk end, and in the meat and potatoes in the middle, in the mid-teens.

[00:35:05] Evan Thornley: They've got global equities, private credit and stuff like that. And we'll just lower risk. at the same altitude. [00:35:10] So that seems to be what's driving the investors is those two propositions.

[00:35:14] Chris Bates: Well, I mean, I think there's close to 4 trillion in super now, right? there's an attack on super, which is a different [00:35:20] story, but ultimately there's a lot

[00:35:21] Chris Bates: of cash

[00:35:22] Chris Bates: and, you're right when you when a lot of advisors, and even people are DIY, right? A big part of that is where they put their portfolio and

[00:35:27] Evan Thornley: Well, well, and a lot of those advisors I mean, [00:35:30] every, every advisor I talk to, they've all got clients who've got resi property investments. Most of 'em are bad investments. The advisor that tears their hair out and says, well, I dunno why you're investing in that thing. and then the client says, well, what should I [00:35:40] inve?

[00:35:40] Evan Thornley: If I wanna be in resi property, what should I do? And the advisor goes. I don't know. I don't know anything about it. I've got no product. I've got no nothing. So there now will be, every well-balanced portfolio [00:35:50] should have the largest asset class in the country in it. Right. This provides a, a structural industrial

[00:35:56] Evan Thornley: strength investment grade way of being exposed to

[00:35:59] Evan Thornley: the [00:36:00] asset class.

[00:36:01] Veronica Morgan: So on the other end, you've got

[00:36:03] Evan Thornley: Yeah.

[00:36:03] Veronica Morgan: home buyer product. How's that going?

[00:36:06] Evan Thornley: We'll,

[00:36:06] Evan Thornley: we'll get back to that. That's where we started and we're super [00:36:10] committed to, you know, there's a third of a generation who don't have the bank and mom and dad, and, as capital growth keeps going, it's, you know, the truck is going further and further off into the distance for that [00:36:20] generation. So. Slip party equity is critical.

[00:36:22] Evan Thornley: most of it's coming from the bank and mom and dad. Increasingly it's gonna come from government, but also from players like us and Frontier and Hope Housing and [00:36:30] some of our other colleagues who are trying to deliver similar solutions. they're all friends of ours and I think they're all doing great work.

[00:36:35] Evan Thornley: yeah. Look, uh, Chris, you'd understand this particularly, working your way through with the [00:36:40] banks. the buy side, it's all gotta go through credit. And therefore they're gonna say, oh, well hang on, who are these guys? What's the second mortgage? How does all that work? And so you've really gotta get [00:36:50] pre-approval of your mechanism through the product approval processes of those banks.

[00:36:54] Evan Thornley: And that takes years. you know, we've got a number of, lenders that have done that work with us, that [00:37:00] are reasonably competitive lenders. But, the big guys aren't gonna do that work until we are big volume, which is a big chicken and egg. So we're buying homes, right?

[00:37:07] Evan Thornley: Our client's gonna be successful one time in three. [00:37:10] So there's just a lot more friction points in that, process. And so that was moving more slowly. I'm committed and determined to solve all those friction points in time 'cause there's generation [00:37:20] of people that need our money. and we will.

[00:37:21] Evan Thornley: but, I'm just gonna build the business to scale first and make sure we are, delivering great result for our investors. And then we'll have the resources to put into [00:37:30] smoothing that journey on the buy side.

[00:37:32] Veronica Morgan: So I guess you've, you've gone for the easiest of the three options. First,

[00:37:36] Evan Thornley: Well, the customers voted with their feet, but just reopened the [00:37:40] doors on home Flex, and they just poured in from

[00:37:42] Chris Bates: Yeah.

[00:37:43] Evan Thornley: And we went, wow.

[00:37:45] Evan Thornley: We got knocked over in the flood of demand. We were like, oh wow, You know, we obviously have a real passion about the first home [00:37:50] buyers, and particularly the folks that don't have a bank of mom and dad.

[00:37:52] Evan Thornley: There's, you know, we really want to help but it all, I'm not saying every home flex deal has that, but gosh, every Friday morning at investment committee, there's normally at [00:38:00] least one deal where you go, oh, I'm so proud of what we're doing here. Right. You know, we've gotta guide out. Pendle Hill, I think.anyways, in a $1.6 million home.

[00:38:07] Evan Thornley: He's

[00:38:08] Evan Thornley: a, paraplegic from an auto [00:38:10] accident. got a payout from the insurance. He bought the home outright with that, which obviously was he's very grateful for. And he is got some income through disability. he wanted to get one [00:38:20] of those factory main VWs that you can put a wheelchair in. Okay. They're a couple of hundred grand.

[00:38:25] Evan Thornley: That's not a bank in the country that's gonna give that guy a couple of hundred grand, right? We couldn't be happier. we liked the [00:38:30] asset. We know he is getting a good assets in good home. Gave him a couple hundred grand. He bought the car. We had another, couple in their mid forties, not far from there.

[00:38:36] Evan Thornley: Actually, they're $1.7 million home, a real rodwell. [00:38:40] he's going to have through a shock industrial accident. He's now out of the workforce and they need to make some modifications to the home. He got a payout, they paid down the mortgage a fair bit. They [00:38:50] only had about four 50 left on the mortgage, but she couldn't service.

[00:38:53] Evan Thornley: They were gonna have to sell the home and they couldn't pay for the home modifications. And we gave them 220 grand and they paid [00:39:00] 150 off the mortgage and at the home modifications. And they're gonna stay in the home while the kids, till the kids grow So, divorce, awful

[00:39:06] Evan Thornley: stuff, right? How many

[00:39:07] Evan Thornley: times you're sitting in the settlement [00:39:10] conference and too much of the marital asset pool is tied up in equity in the

[00:39:12] Evan Thornley: family. and then you need the wisdom of Solomon. The only way you can get the money out both parties is to cut the baby in half and sell the

[00:39:18] Evan Thornley: home, right? Which is [00:39:20] just at the worst possible time for everybody. So,our first client who was a divorcee, that she was in a $2.3 million period home in Elwood in Melbourne, and we gave her [00:39:30] 250 grand, which was just enough given their other assets so she could then buy out soon to be ex hubby.

[00:39:34] Evan Thornley: And her and the boys got to stay in the home, stay in school. She's moving back into the workforce now. But [00:39:40] like if they'd sold the home, she's in Frankston, she's outta here right away from Grandma Maru, away from the boys' school, away from dad. Like who is that helping? Absolutely no one, right?

[00:39:49] Evan Thornley: And [00:39:50] so both she and dad are grateful that we could do that deal. Her and the boys are staying in the home. Dad's gonna be close by. He's got paid out his share. He then can buy a home. [00:40:00] We haven't in this case, but I'm sure there will be cases where we then give him buying Boost as well if he's buying a ride.

[00:40:05] Evan Thornley: Well, and we'll help on both sides.

[00:40:07] Evan Thornley: so there's a lot of situations where we are [00:40:10] the best and often the only answer for people. and in a lot of those situations I'm really proud of the difference we're making. and our model is always a win-win. Yeah, I'm really pleased with how it's [00:40:20] rolling out in the real world.

[00:40:21] Veronica Morgan: how would you compare it? Say, you know, if you, you've got the Victorian government has a shared equity scheme for first home buyers. Federal government's got one too. I'm

[00:40:29] Veronica Morgan: not sure if [00:40:30] it's actually launched yet, but

[00:40:31] Evan Thornley: No, it, it's not actually, I've met with the,

[00:40:33] Evan Thornley: the Housing Australia folks to sort of brainstorm and help 'emLearn from our experience and I, and I hope we've been helpful there.look, [00:40:40] I think

[00:40:40] Evan Thornley: those government schemes mainly are really good. And honestly, they can be more generous in terms of the amount of money and

[00:40:45] Evan Thornley: their effective

[00:40:46] Evan Thornley: financial returns, you know.

[00:40:47] Veronica Morgan: on capital growth.

[00:40:49] Evan Thornley: Yeah.

[00:40:49] Veronica Morgan: [00:40:50] but also then they'll finance you into a rubbish asset that's gonna get no capital growth. In fact, they'll give you extra money to go into a new

[00:40:55] Evan Thornley: build because, they wanna stimulate construction. mean, but still I think those are great [00:41:00] solutions to people that.

[00:41:01] Evan Thornley: Really often give a lot of people a chance for home ownership who would never get it or couldn't get it for a long time. the money's on very reasonable terms. I think there's a few elements, and I told the [00:41:10] Housing Australia folks this, this idea that if your income goes up, you become ineligible and then you gotta pay the money back.

[00:41:15] Evan Thornley: Well, who's gonna refire you outta that thing? so I think they're gonna have to change those. [00:41:20] product elements. 'cause they're gonna cause chaos in a few years time. I hope they will. And I'll listen to people like me and others who've got some bit of experience in this.

[00:41:27] Evan Thornley: but generally I'm a big supporter of, governments doing [00:41:30] that. Again, there's, nonprofits have been doing shared equity for 20 years in a range of different ways. And people like Hope Housing and dear friends of ours and great people doing great work. giving money on very.

[00:41:38] Evan Thornley: Generous terms [00:41:40] to essential workers to be able to live close to where they work, particularly in city when you know that's not gonna happen otherwise. I think everyone in the shared equity industry, I regard them as colleagues and [00:41:50] friends and we try and help each other out. And, I wanna see this sector build and I wanna see to be ethical

[00:41:55] Evan Thornley: and thoughtful about what we do together. And there's plenty of room for a whole bunch of [00:42:00] players that each brings their own angle or their

[00:42:01] Evan Thornley: own,

[00:42:02] Evan Thornley: particular mix of what they're trying to do and how they're trying to do it. I think it's great.

[00:42:06] Chris Bates: And is there, um, a reason you're not doing any sort of leverage in this, sort [00:42:10] of le lending the money or getting the money from the older generation roof, you know, thathome flex. is it because there's no cash flow to sort of pay the cost of the

[00:42:17] Evan Thornley: Uh, well, I mean the,

[00:42:18] Evan Thornley: the cashflow come from [00:42:20] the churn and you can lever these things quite

[00:42:22] Evan Thornley: safely, but right at the moment, I mean, again,

[00:42:25] Evan Thornley: the

[00:42:25] Evan Thornley: power of the mechanism and the quality of the asset selection. Basically means we can deliver [00:42:30] really strong returns at really low risk. So why add risk?

[00:42:33] Evan Thornley: I just don't wanna add risk. I don't know anyone a dime, right? our fund can't go broke. It can't default on [00:42:40] anything. It doesn't know anyone anything. We're not worried about interest rates, and I'm still meant to be delivering mid-teens returns, and I'm inadvertently in the twenties right now.

[00:42:47] Evan Thornley: So why would I risk that? And try and [00:42:50] juice up the returns even more with some leverage and put risk into my investors. they don't need it. We don't need it. once the portfolio's mature and it's churning, it's throwing off cash.

[00:42:59] Evan Thornley: some of [00:43:00] the big US funds that are in a somewhat similar model, ours are now just securitizing the whole book.

[00:43:04] Evan Thornley: They're not taking money from equity investors at all. they're securitizing the book and they're getting money at 8% on the [00:43:10] securitization rather than. Promising the investors 14. maybe that'll happen future.

[00:43:13] Evan Thornley: that's probably upside to our model. but right now it, you know,Hippocratic Earth first do no harm,

[00:43:19] Chris Bates: and no one's

[00:43:19] Evan Thornley: our [00:43:20] investors capital

[00:43:21] Chris Bates: I'm just trying to think of all the stakeholders in

[00:43:22] Chris Bates: this, and even the ATO sort of is okay with it, right? Because they're going well. they were gonna pay no tax on the growth anyway. Right. So there's no

[00:43:29] Chris Bates: CGT [00:43:30] there, as

[00:43:30] Evan Thornley: no lost revenue to the feds on this, right? No one was paying land tax or to the state. No one was paying land tax on this before. No one's paying land tax now. No lost revenue there. our investors [00:43:40] will still pay tax obviously

[00:43:41] Chris Bates: They pay

[00:43:41] Evan Thornley: returns. Yeah. but we're not paying, you know, no one's paying CGT on the asset 'cause it's principle place residence.

[00:43:47] Evan Thornley: It's.

[00:43:47] Chris Bates: yeah, yeah. So they get the benefit. So the investor's not really getting much [00:43:50] cashflow. Right. So you're not. Promising a much from a cashflow dividend yet,

[00:43:53] Evan Thornley: Well, no, we are because, we are distributing the returns now when the contracts are realized. So when the portfolio starts [00:44:00] churning, right, if 15% of the portfolio churns by year three, then we are throwing off cash, right? We'll be delivering 15 to 20 or more percent money on money returns on the [00:44:10] original investment from year three onwards.

[00:44:11] Evan Thornley: Like this thing's a cash machine. As the portfolio gradually self liquidates through return.

[00:44:16] Chris Bates: Yeah. Yep. You're not just reinvesting that money and just giving

[00:44:18] Evan Thornley: well, the next fund will [00:44:20] probably have a dividend reinvestment option, so we'll let people do, either, either take the cash or just keep anteing up.

[00:44:25] Chris Bates: Yeah. We gotcha.

[00:44:26] Evan Thornley: Have you got a story just that we can all learn from just a bit of a [00:44:30] tail to finish

[00:44:30] Chris Bates: yourself,

[00:44:31] Evan Thornley: this is an old story, but it just highlights to me the challenge of being a, landlord. I just remember that. clients of ours, hardworking people, he's a plumber, she's a teacher's [00:44:40] assistant. They live in Altoona Meadows, which is a pretty modest working class, suburb and middle ring western suburbs of Melbourne.

[00:44:46] Evan Thornley: just a modest family home, hardworking people put money [00:44:50] aside. They got two tween age daughters and they bought two off the plant apartments. sort of one for each, Saved money, sacrifice, trying to build wealth for the next [00:45:00] generation. and we were talking, they're landlords of ours.

[00:45:02] Evan Thornley: We, we serve them, to manage those properties. I was talking to them and like, geez, we wish we could move To Central Aona down by the beach, near the railway station, [00:45:10] next to the kids' school. old town, Altona, much more valuable. Lovely, lovely part of the world actually.

[00:45:15] Evan Thornley: but of course they couldn't afford it because they put their money in the investment properties, which were going [00:45:20] nowhere. And I said, I know this is gonna sound almost, foolish, selfish advice. I said, sell the two investment properties and buy a nicer home in Central Al. [00:45:30] We'll double in value.

[00:45:30] Evan Thornley: In 10 years, these things will go nowhere. you'll pay no tax on that growth and you'll get to live in a lovely home close to the girls' school and transport amenity in the beach. [00:45:40] That is a total win-win for you. I mean, I'll lose the business of managing your two investment property. I couldn't care less.

[00:45:45] Evan Thornley: and they, they really struggle with that decision 'cause it sounded like they'd been really working hard [00:45:50] and they've been trying to do the right thing and put money aside and not spoil themselves. But actually the best financial decision they could have made was to buy a lovely period home in Central [00:46:00] Altoona and enjoy living there for 10 years, and they would literally be about a million and a half dollars better off than hanging onto these two pieces. Apartments. Yeah. So that's not dumb. These are good [00:46:10] people, but they got sold a bill of goods by the spruikers who were selling those bloody off the plan apartments, right? and were trading on the aspirations that they had to look after their family and build [00:46:20] themselves a good retirement.

[00:46:21] Evan Thornley: Look after next generation. All the right things that hardworking people do and they've been ripped off. but there's a way out. But they've gotta get comfortable with that, which they haven't

[00:46:28] Evan Thornley: done, and I hope they '

[00:46:29] Veronica Morgan: cause [00:46:30] you gotta s we gotta swallow a bit of pill. We've got a couple of client that's, we are doing vendor advisory work for them. they've got three properties. We've just helped them sell one. It was a an apartment in Sydney that was [00:46:40] going backwards, that got a house and land package.

[00:46:42] Veronica Morgan: The house, you know, that's going backwards. So we are working, that's where we're moving on to next. and then there's another property because until they [00:46:50] recognize that waiting wasn't gonna solve their problem,

[00:46:52] Evan Thornley: They,

[00:46:52] Evan Thornley: they keep saying, oh, I thought the market would've gone up by now.

[00:46:55] Evan Thornley: And it's like, it has,

[00:46:56] Veronica Morgan: to come. Good. it's a really, really challenging, uh, [00:47:00] situation, but they've had to sort of bite the bullet and we start moving to get rid of them so that then they can buy a home for themselves to live in,

[00:47:06] Evan Thornley: you know, we have a obviously buying advisory part of our business. You know, my [00:47:10] colleagues Warwick, and Scott Mcg and others,

[00:47:12] Evan Thornley: we used to call that changing trains. you gotta stop, get off the train. It takes you a bit of time and maybe to go the other platform, but then you get on a fast [00:47:20] train and not long from now in a much better place.

[00:47:22] Evan Thornley: It's really hard to get people to change trains. Mm-hmm. And, I'm good. It's great. This client is actually taking the bitter pill and doing it with you and [00:47:30] we all know they'll be much better off in a few years. So that was, and we would, we tried to do that with our clients for many years. and I guess we're just doubling down on that and saying, well, you can change trains to a better [00:47:40] investment property.

[00:47:40] Evan Thornley: And that's a really good start. Well now you can just change trains into my fund mate. And, that thing's gone off like a rocket. And, honestly, it's just a better deal. And, and so, [00:47:50] landlords are cautious people, they invested in property 'cause they don't trust the equities markets with good reason.

[00:47:55] Evan Thornley: Right. they're careful people. That's why they invest in property 'cause it's safe. And so [00:48:00] so many of them say to me, Evan. your fund just sounds too good to be true. But if everything you tell me is true sooner or later, yeah, I probably will sell my properties and put the money in the fund.

[00:48:08] Evan Thornley: And I said, take your time. minimum's a [00:48:10] hundred grand. Just, just.Come along, put a little bit of money and get confident, get comfortable. Don't, make no sudden movement, step away from the vehicle. and over time, if you're confident and comfortable, and you'll see the fund [00:48:20] growing, you'll see, I mean, goodness knows how many serious investors and major families and others are now in our funds.

[00:48:25] Evan Thornley: So people will get cnce over time that the sort of social proof. And then over time, I think more and more [00:48:30] of them will actually choose to cease being landlords. but still invest in the asset class. They know and love and trust. we're just trying to be a better way to do it.

[00:48:37] Veronica Morgan: Yeah. Interesting one. Well look Evan, it's been [00:48:40] great to get an update

[00:48:40] Evan Thornley: Great to see you both.

[00:48:41] Veronica Morgan: as to what's been happening in your space. we, uh, appreciate your time and thanks for coming along.

[00:48:46] Evan Thornley: Thanks again. Great to

[00:48:47] Chris Bates: Thanks, Evan.

[00:48:48] Speaker 7: If you have a question that you'd [00:48:50] like us to answer in an upcoming q and a episode, you can send us a voicemail or written question via the website. The elephant in the room.com au. Or you can email [00:49:00] us directly at questions at the elephant in the room.com

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