I took my first step into the investment market in April 2012.

It was a nervous, stuttering step, a bit like a self-conscious Year 11 schoolboy approaching a girl at a school dance. I wanted to and I knew I should, but I was worried about the commitment and consequences, both medium and long term. What if something went wrong?

Finally, I took the plunge and bought a modest, four-bedroom house in Ipswich, west of Brisbane, for $295 000. It wasn’t quite as I had mapped out with John — a $500 000 property that would be worth $1 million in 10 years — but it was what I calculated I could afford, bearing in mind the pre-requisite of good ‘cash flow’. The other positive was that I bought in a high-growth area, which is one of the most important principles of investing.

At the time, I remember Uncle John (as opposed to Boss John) playfully dubbing me ‘a numbnuts investor’. I had taken so long to decide: going to contract in January, but then backing out a few times over a period of a few months. He was adamant that, in future, I would need to act far more quickly and decisively. I was naturally conservative and risk averse. I had seen my parents’ financial troubles, a lot of them self-inflicted, and those ghosts can haunt you when you’re stepping into unfamiliar territory. Still, at 21 I found myself borrowing money and, for the first time in my life, buying an asset of significance.

According to John, I wasn’t buying a ‘property’. What he wanted me to buy was real estate. He used the word ‘property’ because most people — including me at that time — don’t know the difference between property and real estate. It turns out that real estate is defined as ‘land and buildings’, whereas a property is the physical structure: the building that sits on top of the land. John wanted me to buy the land because that’s the ‘real’ part in real estate. The land is the only component of the investment that increases in value. Buildings only depreciate: at one point they are brand new, but they only get older so how could they do anything else but reduce in value? John was encouraging me to invest in an asset that would grow in value and, in his experience, land was the best asset to do just that. While there are plenty of other ways to invest your money, it is no coincidence that the Top 250 Rich List, published annually by The Australian newspaper, says 20 per cent of the Top 100 have made their money out of property.

There’s only truth in numbers

As John likes to remind me (and anybody else prepared to listen), ‘there’s only truth in numbers’. So, let’s start with some clarity around how the numbers are calculated when it comes to real estate. The Barefoot Investor author Scott Pape has sold more than one million books in Australia and I agree with pretty much everything he says and does.

However, there’s one part of his book that I challenge: the numbers around property. In his advice to readers, Pape points out the following: ‘Now it’s true that, in some areas of Australia, property prices have doubled every 7–10 years over the past 24 years — but not when you factor in inflation, interest costs, upkeep and maintenance’. He cites a PhD who found ‘the average return on Melbourne property from 1901 to 2015 was 2.1 per cent per year after inflation’. But I challenge such numbers and believe they fuel some common misconceptions about property.

The facts are these: the median house price in all Australian capital cities has doubled roughly every 10 years. There are two ways to measure house prices: the median and the average. The median is the middle point of the market. The average is determined by adding together the sale price of every house sold, then dividing that figure by the total number of sales. The median is just the middle number between the highest and lowest price. The reason the median price is preferred by property people is because it’s widely considered a more accurate indicator of the market because it better reflects the sales occurring in each period.

The average can be heavily distorted by both the top and bottom end of the market, leading to significant volatility. The median, on the other hand, is a lot more reliable in that it remains unaffected by ‘outlier’ sales. If you study the median house price in Australia over the past 40 years, you’ll see it has more than doubled every 10 years.

Table 11.1 (overleaf) shows the median house prices in the main capital cities over the past 40 years.

The other thing that’s important to understand about these numbers is that they refer to the median house price — that is, a block of real estate (i.e. the land) with a house on it. The media will typically report on the ‘house’ price but, more accurately, it is the ‘dwelling’ price, and the dwelling could be a unit, townhouse or house. It is quite an exercise to pull this data together given that, over the years, the median house price has been calculated and categorised in different ways, but this is as close to an accurate depiction as possible. It was a crucial difference, and one that John wanted me to understand; I was going to be investing in real estate — that is, a house on a block of land — not property, which could more broadly incorporate units and townhouses.

In simple terms, the median house price in these capital cities has doubled every 10 years, increasing by at least 11 times over the past 40 years (as is the case in Perth). Adelaide has increased in value by 13 times, Brisbane and Sydney by 17 and 18 times respectively, while Melbourne has increased in value by nearly 20 times. The reason for the variation is best explained by exactly when the data was obtained.

House prices don’t rise in a linear fashion. Growth comes in spurts, with up to between 60 and 80 per cent of the 10-year increases occurring in a two- to four-year window. We saw this in southern capitals recently where 69 per cent of the decade’s growth occurred between 2014 and 2017 in Sydney, and 64 per cent in Melbourne over the same period. In Brisbane, prices increased by 40 per cent between 2009 and 2019, but between 1999 and 2009, they almost tripled. Despite the fluctuations, the general trend is consistent: prices roughly double every 10 years.

It is worth noting that the rates of growth shown in table 11.1 are compound rates of growth. The significance of this is best explained by the Rule of 72, a simple maths method for determining the number of years an investment will take to double in value. If you divide the number 72 by the per-year rate of growth, the answer will be the number of years required for the investment to double in value. For Melbourne, it would be 72 divided by 7.8 (the per year rate of growth). The answer is 9.2 years. (You’ll learn more about rates of growth in chapter 14.)

The other key factor is the inflation rate, which, between 1979 and 2019, averaged 3.9 per cent per year. Subtract 3.9 per cent from median house price increases — 7.8 per cent in Melbourne, for instance — and you’re left with growth of just under 4 per cent — a far cry from that 2.1 per cent calculation.

Another important disparity not captured in table 11.1 is the average size and location of the properties sold. Yes, the median house price in Melbourne rose from $130 000 in 1989 to $780 000 in 2019, but very rarely (if at all) are we comparing apples with apples.

That the median house in 1989 most likely sat on top of a 1000m² block 15 to 20 kilometres from the Melbourne CBD is significant. In 2019, the average size of a block of land dropped to 392m² and it was located roughly 40 kilometres from the Melbourne CBD. A 1000m² block of land within 20 kilometres of the city would probably have been worth between $1.2 million and $2 million by the end of 2019 (exactly how much would depend on the infrastructure, zoning and population growth). A good percentage of those original (1989) properties have been subdivided or are now home to townhouses or units (like the first home my mum and dad owned in 1987). If I take a conservative land valuation of $1.2 million, it represents a return of 7.7 per cent per year before inflation and 5 per cent after subtracting inflation (inflation was a lower 2.68 per cent between 1989 and 2019). The areas now worth $2 million would push that figure closer to 7 per cent after inflation. This further brings into question that widely accepted 2.1 per cent figure.

At this point you might be asking, what about the purchase costs, such as interest, maintenance and holding costs (which include agent management fees, council rates, home and landlord insurance, maintenance and body corporate fees)? I purposely don’t factor these in because, if you were to factor them in you would also need to factor in rental returns. For example, the same home as above bought in 1989 for $130 000 would return you about $700 per week in rent today. That’s $36 400 in rent per year. The reality is that your returns are even higher if you factor in such things as rent net of costs (i.e. net cash flow). This would increase returns to well over 5 per cent after inflation.

The biggest factor in play is that Australia has a growing population and a finite supply of land. As John puts it in his book 7 Steps to Wealth, ‘it’s all to do with supply and demand. Land is a commodity that is limited in supply and for which demand is growing as the population increases’. Australia has one of the fastest growing populations of any developed nation. COVID-19 might have flattened the trend temporarily but that’s unlikely to last beyond international borders fully opening.

In fact, Bernard Salt, Australia’s pre-eminent demographer, believes the country could go the other way and experience a population explosion in the 2020s, as it did in the post-war and global financial crisis eras. ‘This event will reshape consumer behaviour; it will unleash government and corporate spending; and it will prompt heightened demand for post-pandemic migration to the “safe haven” of Australia,’ Salt explained in his column in The Weekend Australian newspaper in March 2020.

Therein lies the opportunity. The average block of land in Australia in 2020 (as I write this book) is 411m² and within 30 to 50 kilometres of the CBD (depending on the city). In a decade, I’d expect that average to drop to sub-300m² and be 40 to 60 kilometres from the CBD. The suburbs offering 411m² blocks of land will be at full capacity in the next five years, pointing to the likely and inevitable transition to townhouse and unit accommodation. The result will have land prices doubling on a price-per-square-metre basis. We will evolve from having one dwelling on our block, to three or four. That is our opportunity!

As we enter the third decade of the 21st century, the Australian population is edging towards 26 million people. As a nation, we have been growing by about 375 000 people per annum: 145 000 of those are births in excess of deaths, a further 132 000 from overseas migrants, while the balance is largely driven by the influx of overseas students. To help keep housing affordable, we are moving to more dense accommodation (medium to high rise) or building on smaller blocks, further away from central business districts. Table 11.2 (overleaf) shows what the progression looks like if you break down the cost of a block of land per square metre where 1980 assumes a median land size of 1000m² (against today’s average land size of 411m²).

You can see that the land price per square metre has increased 15 times in Perth and 35 in Adelaide. Again, these numbers point to a growth rate of around 5 per cent after inflation is taken into account. Unfortunately, once again the disparity is not captured — the price per square metre sold in 1980 was 10 to 20 kilometres from the city centre (depending on the city), whereas most of the data in 2020 consists of land located twice that distance from the CBD: 30 to 50 kilometres, depending on the city. The true number would be more than 40 times.

By way of example, John bought a block of land in 1984 in Brisbane that was located roughly 20 kilometres from the CBD. It was a 1000m² block and he paid $16 000 ($16 per m²). That block without a house on it is worth $750 000 ($750 per m²) today. This means it has increased in value by 46 times in about 40 years. That’s a return of 11.3 per cent per annum or 8.1 per cent after adjustment for inflation. That’s before you account for the $540 per week ($28 080 per year) in rental income. That’s irrefutable evidence.

Figures from table 11.2 confirm that the median house price increased by 11 to 20 times over 40 years (depending on the city). Table 11.2 shows that the price per square metre of a block of land has increased by 15 to 35 times (again depending on the city), with the real number more likely by 46 times in the same period (as John’s did — from $16 per m² to $750 per m² — in the example above). To put that in perspective, shares on the Australian stock exchange over the same period increased by 11 times.

The value is in the land

Land is the best-performing asset class in Australia, certainly as far as I can see. This was the key message John was teaching me: invest in an asset that will grow, and if you want to invest in something that will ‘grow thy gold’, your best option is land.

Worldwide, there would be no better example of the power and appeal of land than the McDonald’s retail chain. If you surveyed 1000 people, most — if not all — would tell you that McDonald’s is in the fast-food business, when more accurately today it is in the real estate business. Selling hamburgers is almost a sideline! This is captured in one of the best books I have ever read, Behind the Arches. Author John F. Love describes the crucial turning point in the company’s journey, when McDonald’s chief financial officer Harry Sonneborn told owner Ray Kroc, ‘You don’t seem to realise what business you’re in. You’re not in the burger business, you’re in the real estate business. You build an empire by owning the land. What you ought to be doing is owning the land upon which that burger is cooked.’

McDonald’s went from owning no real estate in the 1960s (in fact, they were on the verge of going broke) to having a real estate portfolio of $8.8 billion. Today, McDonald’s real estate is valued at $30 billion. Furthermore, the real estate assets generate McDonald’s $7.5 billion in rent per year, which accounts for 36 per cent of all McDonald’s revenue and 55 per cent of total profit. (The costs associated with real estate are much lower than other areas of the business, hence the disparity in figures.) We thought the McDonald’s burger story was amazing, but it pales into insignificance when compared with its achievements as a land holder!

A word of caution: not all land performs equally well, and not all land is going to perform as extraordinarily as the land discussed in this chapter.

However, if you start by focusing on buying land in growing areas, you’re likely to fare significantly better than if you invest in property (as distinct from real estate) and/or the share market. The rationale behind this is that governments and private enterprise will continue to invest in infrastructure to accommodate the growing population. This infrastructure (private, public and community) will drive density, meaning that instead of having one dwelling per 400m², there will be one dwelling per 100m² — even less in the case of townhouses and apartments.

It’s not rocket science and most people I talk to say they know the value is in the land. Yet 26.6 per cent of Australian homeowners don’t own land: they own a townhouse or an apartment, where the land portion is minimal. Almost 50 per cent of property investors are in the same boat: they own a townhouse or an apartment, not the part that is destined to increase in value over time — that is, the land.

As an aside, you’ll remember in chapter 6 that I recounted my parents’ rollercoaster financial ride. Over 23 years, they owned four properties. They bought and sold, using the growth in the properties to invest in businesses that ultimately brought them unstuck financially. However, the properties they bought did well. In fact, if they had held any of them, they would have done very well. Table 11.3 shows the value of their properties today, compared with what my parents paid for them.

You can see that they have all increased substantially in value, with the properties in the 1980s and 1990s increasing in value by three times. The first home they bought — in Coorparoo, where they doubled their money in just a few years — has performed the best. It’s no coincidence that it was their biggest block of land and would have been their longest standing investment. In fact, table 11.4 (overleaf) demonstrates that if you look at just the land values of these properties, the numbers are even more impressive.

Depending on the property, the land component has doubled or tripled. Coorparoo was an old property that they essentially bought for land value alone. Today, it is an inner-city block of land that has been developed into units (no different from the examples I cited earlier). Their next two properties in Carrara were less than five years old when they bought them, so a portion of the price they paid was the house cost. In Robina, they built a massive house, spending 50 per cent more on the house than they did on the land. The point is that Mum and Dad got a lot of things right: they bought the right types of properties at the right times. They just didn’t hang onto them long enough to reap the benefits.

As we’ve established, the property market is cyclical. It doesn’t increase by 10 per cent each year; it grows in fits and spurts with flat periods in between. You need to be prepared to hold the property through a cycle. Hang on for two or more cycles and you’ll do even better. Mum and Dad owned their Coorparoo property for three years and got lucky with their timing. If they still owned Coorparoo today, they would have seen three to four cycles — that’s why the return on Coorparoo is so high.

I think residential land in high growth areas is the best asset you can invest in. However, the principle of this chapter is to invest in an asset that will grow. Importantly, before you do so, make sure the numbers support the theory that the asset will grow. If you’re being guided by a mentor or professional, get them to show you the numbers in similar detail to what I’ve laid out here.

Most people have their own real estate regret story: ‘If only I’d done this …’ or ‘If only I hadn’t done that …’. I’m going to turn that on its head.

Instead of ‘If only’, let’s go with ‘Only if’:

• ‘Only if I am disciplined …’
• ‘Only if I follow John’s three simple steps …’ (see chapter 10)
• ‘Only if I use the heart, head and hands model will I succeed.’

Perhaps the biggest ‘only if’ is ‘Only if I make a start’. ‘Only if I make a start will I eventually make it to my final destination: financial freedom.’

So let’s get started!