Scott O'Neill on Buying Commercial Property as a Founder

Kirsten Scott0:00
But as you all know, our mission at BOA is basically to make quality networking and advisory accessible to entrepreneurs at every stage.

Scott O'Neill0:08
And today, trust me, I think we're going to have our minds a bit blown.

Kirsten Scott0:12
I was just sitting back there talking to Scott, and what he's accomplished in a relatively short amount of time is, is pretty remarkable. And he has some really practical, I guess, advice that really any of us can implement. As we're building our businesses. Rethink Investing is his commercial property buying agency, although he does have a group, Rethink Group, which holds 8 different companies. So he's vertically integrated multiple businesses to increase the value of every client he has, which is something that it's a point that I wanna base a lot of today's conversation on. He's an expert in de-risking business through property. So building your property portfolio while you're building your business. Now, I don't think I need to remind everyone that business goes up, it goes down. You never know what's happening. Hopefully it just always keeps going up, but if it doesn't, you want something to catch you and property is a great way to do that. And Scott specialises in commercial property and in particular cash positive commercial property. He's also a true entrepreneur.. He went from engineering to investor to entrepreneur with 8 companies, many of which have had extreme growth. So could we please give Scott O'Neill a big round of applause?

Scott O'Neill1:35
Thank you.

Kirsten Scott1:38
Now, where should we start? I think we should start in property. Yep. Actually, no, let's start just a quick background of yourself. Now, you were an engineer. What motivated you to get out of that game and to seek wealth through property?

Scott O'Neill1:56
Yeah, well, I guess I wanted to be an engineer because I like working outdoors and I like the idea of sort of a non-office job. And then once I started it, it was worse than an office job because every 2 years you had to chase the next project. Like the hours they do are crazy. Like they're, it's so different from—

Kirsten Scott2:13
Office job people?

Scott O'Neill2:14
Oh no, the engineers. It's like a competition who gets in first and who leaves latest. Like there was literally a ticketing system and you'd see people get in at 3, 4 AM and stayed at 8 PM at night. It was, I don't know if it's still like that, but I just thought this is crazy. And I remember just looking at all the 50-year-olds at the time and they looked very unhealthy and unhappy and that like, but they lived for work and I just thought that's not me. So the romantic notion of building big things as an engineer was quickly squashed and that was, that was the end of the dream. But property kind of became a bit of a scapegoat of like maybe if it went well, my retirement's not 65, it could be 55 or 50 if it really goes well. So I just, I just went deep into property. So I just went like all weekends I'd just go, you know, I'd have spreadsheets and just look at every single property in my budget across Australia and have a system of like capital growth upside, cash flow, break it down almost in a numerical way and then just try to pick the best one or lowball it and just doing that for a couple of years went really well. First property was in Sydney. The difference of that asset was it had a granny flat on it. So it was a house, it was the worst house in Sutherland, the whole Sutherland Shire. It was a fibro house on a highway, but it was just cheap enough for me to afford. It was $480 grand and it was renting for about $660 a week with the dual income. And that was enough to clear about $15 or $10 grand per annum. So the way I looked at it back then, 10 grand a year, it's 10 grand pay rise. I got a free holiday every year and I used that to, I guess it was positively gearing. And this is at a time, 2010, which is like it was all about negatively geared still then. So it was, it was a bit different. I got lucky with that deal. I had a lot of capital growth. It leapfrogged us into another one. But yeah, where it really kicked off was unit blocks. I started buying regional unit blocks and strata titling them, and all of a sudden I was making more money in 4 hours of work a week than I was in my job. And that's sort of when it— I didn't feel like an engineer anymore.

Kirsten Scott4:22
And so when— what was the point where you switched from investor to business to entrepreneur? And can you just give us— because obviously I did a very high-level introduction of the business— could you just give us a little bit more, um, paint us a bit of a picture of your businesses and how they work together?

Scott O'Neill4:38
Yeah. So I guess the real short storey is after I bought a few properties, strata titled them, I was making pretty good money. I started then just talking to my broker a lot, trying to like refinance and go again. And he just put us in a one of the, like he recommended one of those property magazines. I can't remember which one, but it was basically like I had 5 or 10 properties at the time, went in that, and then all of a sudden 50 people reached out saying, how did I do it? At the time, I quit my job because we had about $120,000 passive income from the properties and we just went to Europe for 6 months. And a lot of people were asking, I was doing an MBA at the time because I was still in the, like, I was going to want to be a CEO at the time to climb the corporate ladder. That was kind of ingrained through me. I was earmarked to do it as well. I was working for like an ASX company called Adelaide Brighton. They were paying for my MBA and Yeah, I thought that was the dream. It was the corporate dream, but I just burnt out because I saw the progression. Like for me to get that next job, which was a, I was in a mini GM role. The next GM role was a state level one. I was 24 at the time, 25. I had to wait till 40 to get a look in. So I was like, I'm going to sit in this role.

Kirsten Scott5:52
I'm too impatient for corporate life.

Scott O'Neill5:54
It killed me. It killed me. And then I was making more money on the side with this and Yeah, I quit. My boss thought I was an absolute idiot. My dad said, you're an idiot. So everyone was saying I was just throwing away literally everything I built. And then I had this debt with property, but obviously it was cash flow positive, but it's still risk. You don't walk away leaving me into debt and portfolios, but I just knew it was running like a business. And that's when, yeah, when I was in Europe, we went in that magazine and then people started reaching out, help us buy properties like what you did. I had no idea what a buyer's agent was at that time. I just started charging $5,000 cash and illegally because there was no licence or anything like that. But I don't, you know, I've worked out 6 months later you've got to have licenses. So I got all those and then yeah, it's charged a little bit more. And yeah, all of a sudden it went from doing 1 deal a week to 3. And then within 3 years of business, we're doing about 40 transactions a month. And then Yeah, it just kept going and that's how the Buyers Agents started.

Kirsten Scott6:56
And now, so the group has 8 companies and I want to get into more detail in terms of why you did that, but just can you give us an overview of what some of those companies are and why you have them? Yeah. Well, one wasn't enough for you. Yeah. I know, I know. I don't have 8 and I've already got chaos in my life, so I can't imagine what 8 does.

Scott O'Neill7:15
So look, I guess the way I've done business is like going up and down the value chain. So The first one was the buyer's agency. I was just helping people. I was doing it before I even had a business. So this is how I've kind of run all my businesses and that's why I've never had one fail because they work without websites, without marketing. Like they just, there's a demand there. So the first demand was helping people with property. Then we started, it was mostly residential back then and we were building large portfolios, but we moved quickly into commercial. As soon as we did that, we found that all the mortgage brokers were working at the time were just no good with commercial. And it became a real big problem because it started blowing up deals, clients were losing money, the strategy was just off because there was a weak link in the chain. So, my idea was let's control that weak link. And we hired someone internally and then that's Rethink Financing and they've just won the award for the best broker in Australia last week. So, they've become a really fast-growing business on their own right. And it's really just, you had to help people get finance. And then the next problem was all the lawyers we were using were conveyancers and they're no good with doing legal lease reviews on commercial and dispute resolutions and stuff like that. So then we created a legal firm. And then the next was insurance. You don't just go to Budget Direct to do a massive industrial property or a shopping center. You gotta get a surveyor out there and work out the value of the aircons and then insure it. And so we had to then fill that gap. And, you know, one of the fastest growing businesses right now is Rethink Renewables. So once we had bought thousands of commercial properties for clients around the country, we realised there's huge amounts of industrial properties and shopping centres with big roofs. And some of the bills they're paying for electricity can be $200,000, $300,000 a month. That's how much these are. So we're like, well, what if you put battery storage and massive solar panels on it and feed it direct to the client, or the tenant rather. Our idea is we finance and own the infrastructure on the properties and sell direct to the tenant and pay lease roof. And, you know, even where the batteries sit, normally it's just where broomsticks and crates are sitting in commercial properties. We can put a big battery storage thing— these are million-dollar batteries— and then pay maybe the client or the owner $10,000, $20,000 a year rent for that. So they're getting instant equity, instant yield, We're getting a return on their unit as well, which could be 30%, 40%, and everyone wins. The tenant has cheaper power, they save 20% to 30% on the mains. So the only loser in this situation is the AGLs of the world, the mains grid. And the idea is if we get a really big portfolio of this, maybe the mains grid wants to buy us out one day. So that's the sort of next step.

Kirsten Scott10:00
So I mean, we'll come back to the vertical integration, how you are literally maximising the value of every client. Let's start now into getting into property or at least growing property. Now your focus is commercial. Why do you like commercial over investing into residential?

Scott O'Neill10:20
So I think everyone should start in residential. So we still do residential, but it's more for people starting out. I think the problem with this industry is everyone's focused on residential and no one's retiring from it. You can't retire on a 4% gross yielding asset. It's just inefficient. Even if it's debt-free, you're still getting 4% growth. Like, that's, that's rubbish. Not as a return on your money. Yeah. And then the argument is, yes, you get capital growth, but you get very similar capital growth rates in commercial for anyone that's actually looked up at the stats. In fact, industrial land has topped all the capital growth figures for the last 20 years. Sydney and Melbourne are number one. You know, they've grown about 280% in the last 10 years alone. So Brisbane's about 190%. Perth about 160%. So massive growth rates and then you get the yield on top. So the return of growth plus yield is significant. The problem with commercial, it's higher risk, higher barrier to entry. So you don't just go into commercial, especially if you haven't invested. It's like, it's as risky as business, especially when people do it part-time. Like at least business and entrepreneurs, they're, they're all in, like this is their passion. Most people buying property, it's a side hobby. You know, if you're gonna spend millions on an industrial property and you don't know how to value it 5% off, you've just cost yourself a lot of money.

Kirsten Scott11:38
So, and I guess, is there risk also in the fact that you are leasing to businesses and business is risky in the first place? So if the business can't pay you, then yeah, you know, you can't like, or if the business shuts or can't, you, you're stuck paying that, that rent yourself, I guess.

Scott O'Neill11:54
Exactly. So you gotta really, like, this is why a lot of you guys could be quite good commercial investors, 'cause you understand business better than the average person. You need to understand business, like trends, like, you know, what's happening with the office market? Is e-commerce booming? So industrial's flying, office is not. Retail in large format's coming back. So they're all moving at different speeds. So you gotta identify what asset class you want first. But yeah, it's, There is a risk with that and then you gotta work out how long it takes to fill, that if you do lose a tenant, what incentives are needed. There's a bit in it and yeah, you gotta know what you're doing.

Kirsten Scott12:29
So, but aside from the risks, which I guess you could call the downside, the, I guess the upsides are that you get a better yield. Yep. And you get a better return on your money and you have a similar or comparable capital gain. As well. Now, if you aren't at the stage yet where you can invest in commercial, whether it be too risky or the buy-in be too high, how do you advise people taking the step before that?

Scott O'Neill12:59
So I always like the, it's almost like a 2 or a 3 to 1 in residential before commercial. So buy 2 or 3 houses, you can leverage more, lower barrier to entry, it's harder to stuff up. And then using the equity of that, like sit on those for 3, 4, 5 years, build as much equity as you can and do one big fat deposit into commercial. The higher the value you spend, the lower the risk generally because you're buying freehold or it's a, it's in a capital city on a good corner. Commercial is not a place to play in the entry-level space and this is what's happening. I've been doing commercial for 10 years and there's all these new investors and buyers agents all jumping in on it and they're all playing with entry-level clients' money. And what they're doing is buying tiny little strata warehouses or units like Melbourne student accommodation type things. And they're the ones that don't get growth because there's oversupply, prone issues. There's a small tenant is naturally going to be more variable. They're either going to grow quick and need a bigger place or vanish because they've gone broke. So bigger stable tenants make life easier.

Kirsten Scott14:04
So, and so I like that. So commercial property may be the better property to have long-term in order to create passive income and equal capital gains. But before that, a good way to get into it is to buy 2 or 3 homes or residential properties. At the moment in the current market, where are you seeing residential opportunities or at least good ones?

Scott O'Neill14:33
Look, Victoria's on the hotspot list at the moment. So we're like, because I've always invested in residential, you know, we got into Hobart 10 years ago, it was quiet for a year, then it boomed. Everyone did the Brisbane thing. It took about 2 or 3 years longer than we thought to grow, but then it boomed and went 50, 60% in 2 years. Perth had its run. The problem with the I guess it is changing. So what's happening with residential property is the rise of the buyer's agents, and we call them like the data warriors. So they've all got access to the same analytics, and that points to one market. So Rockhampton is an example of that. Every buyer's agent with the power of buying 20 to 50 properties per month attacked Rockhampton in the same month. So the values shot up artificially. It's a pump and dump.

Kirsten Scott15:24
It's like stockbrokers. Exactly. I never thought about that.

Scott O'Neill15:27
So look, my prediction is there will be a Royal Commission into the buyers agent industry in a number of years, just because there's low barrier to entry and this pump and dump scheme is starting to get coverage because you can destroy a market in a good way if you're an investor, could grow like 100% in 2 years or 3 years, but then they start selling out and those who don't get out in time, you're not going to get growth for a decade. Or you won't be able to sell it at all. So it naturally, well, it artificially inflates the market beyond what the natural equilibrium of that, you know, suburb could be. So we try almost avoid the data 'cause you don't almost wanna go with the crowd. Like if you, it's just dangerous. If you get in and out at the perfect time, like any pump and dump scheme, it's great. You know, you'll make quick money, you gotta pay capital gains tax, stamp duty, all that. You know, there can be wins there, but like I'm a long-term investor, I just try keep it simple. So Melbourne is growing quickly. Regional centres out there are looking pretty good. Just all the places where owner occupiers dominate is kind of where you'll get the above average growth.

Kirsten Scott16:34
Okay. And what type of yield would you hope to get on a commercial, on a fully letted commercial property?

Scott O'Neill16:40
So yield is a, I guess it varies. So our yield range anywhere from 5 to 9%. So the majority of good deals are somewhere between high 5s and 7%. When you go above 7%, it implies a little bit more risk, and that could be regional markets, shorter lease, the rent's a bit inflated. So high yield doesn't automatically mean better deal, um, because there's more risk. Like, my job as a buyer's agent is to get the best deal for that yield. So an example is like, if we get in a very blue chip market, a 6% yield, but the natural yield in that market, which is called the capitalization rate, is 5%. If we get it at 6%, the difference in 6 divided by 5, it's 120%, or so it's 20% difference in price. So the yield really affects the value and 6% might not sound good, but if there's 20% upside, it's one of the best deals you'll ever get.

Kirsten Scott17:36
And can you share with us your first then, so your first 2 to 3 properties, you mentioned the Fibro and Cronulla or wherever you said. But, but can you just share with us your first 2 to 3 properties that enabled you then to get into, into the commercial market? Yeah.

Scott O'Neill17:53
So the first one in, in the Shire was, was that was $480,000 that grew to like $600,000, $700,000 pretty quick. So I used equity and a bit of savings from my job to then buy another property. This was a unit in Maroubra. So I totally just disregarded the strategy at that point. That was my worst deal. I was just buying somewhere to live and that didn't go good. There was strata problems. There was—

Kirsten Scott18:17
because it was a unit, it was a unit, not a house.

Scott O'Neill18:19
Yeah.

Kirsten Scott18:19
Okay.

Scott O'Neill18:19
So I never buy units and that's the only time I did. Never will again because like I remember the walls were leaking and we couldn't even get strata to fix it. And you're just thinking like the market was slower at that time, so it kind of slowed up the process. That was 2 and a half years after buying that first one. The next one was one like this is 4 years from the first one. So we move slow. 2010, a third deal was 2014. That was a unit block in Port Macquarie. I was living up there, I was managing mines for that Adelaide Brighton company and it was $425 grand renting for $800 a week. So there's 4 units getting $200 a week each. So brilliant cash flow. There's about $25 grand clear at the time, or $20, I can't remember, but instant pay rise.. But then I worked out you can put fire safety systems through, like, you know, block out the walls through giving it integrated fire systems, making sure there's fireproof separation, separate water meters, make sure there's enough car parks. And then you can turn one title into 4. It's basically a change of ownership with a bit of construction. And that jumps the value significantly because you value it as 4 separate 2-bedroom units, which is a lot more than $100 grand each. Might be worth $250 each. So at the time people were investing a lot in super funds. So everyone started buying unit blocks and super funds kind of the same time I was, and that just pushed the values up crazily. Like, so I bought another one in Port Macquarie for $710 grand. This is 5 units on one title. It was worth $1.2 mil within a year just because the market was just changing and we just fixed up, pumped the rents up a little bit to market level. So there's a lot of equity getting created and we're just kind of doing that. I bought a 4 units in Cooma. It was a, like a big block of land there, just subdivided it, sold that land off, kept the 4 units, refinanced that and then bought up in Gold Coast. So it's kind of like I was just trading a lot with just equity and creating value through simple math. Well, it wasn't simple, but it's, I just knew what I was looking for. So I just had in realestate.com, unit blocks, keyword search, like multi-tenant, multi-income, just whatever I could think that could somewhat describe a unit block. And I just found these things all over the country.

Kirsten Scott20:35
Amazing, guys. I forgot to say at the start, please, as questions that you have come up, either write them down or put them on your phone or think of them, because we will open to open discussion soon as well. Now, let's move more to business. We've covered, I guess, your opinion on commercial and why you think it's better and how to actually get to the point of commercial through residential. I'm sure people have more questions as well and the questions can be personalised for yourself. Trust me, if something you got a question on, someone else find value in it. So make sure you ask it. Let's talk about business. Talk to us about the early days of your business. You've got 8 now. I can imagine that would be hard to manage and I do wanna talk to you about how you're able to manage all 8 and what your structure is and how that works. But at the start, in the early days, you've started the buyer's agency, it's commercial buyer's agency. You're obviously able to bring in the initial revenue yourself because you are actually fulfilling it. You, you are doing it as well. Yep. What did the first 2 years look like?

Scott O'Neill21:41
So I guess in the early days it was all operational, less strategy. So this is what happens with any business. In your early years, you might spend 80% of your time on operations doing things yourself and then you might, to 20% thinking about the future. That flips the switch when you get to a larger point. So I'm more 80% strategy now and a little bit of operation and people management, stuff like that. But yeah, it was just long hours. It was just literally just trading your life away for revenue, for just keeping up with client demand. Like it was hard. Like I was, but I was a bit addicted to it. Like you're literally sitting on the kitchen table, like when everyone's gone to bed, just finding deals and then getting into clients and you just go all hours and yeah, I'm glad I'm not there now though.

Kirsten Scott22:26
Yeah, but I like it. You know, a lot of people say like I was working my 9 to 5 and I was doing 2, like it was corporate hours, it was so long and they're like, so I started a business not to do that. And then, you know, I started doing longer hours, you know, like it's a very common story. But were you comparing it? Were you like, oh shit, I thought I'd be doing less hours, not more than what I was doing my corporate job or Or were you like, I know I'm doing more hours, but I'm enjoying it because it's for me?

Scott O'Neill22:51
Yeah, I was addictive. Like it was never work. But when I was an engineer, just trading time, like, and I was managing P&Ls and everything and I'm thinking like, and my boss was like, go out, drive up to Byron and talk to this construction manager and, you know, to sell your product down. But I get nothing out of this. Like you're meant to care. It was all for promotions, but like if I then landed a giant client, like there was no commission or anything, like I was on salary, why would I then destroy my week and then play catch up just for the corporate? And but then you have ownership. It's just a different ball game. Everything means something at that point.

Kirsten Scott23:28
And that's what do you think the mindset is? How did your mindset change as a corporate worker to an entrepreneur?

Scott O'Neill23:36
I think like big corporates, like they're faceless as well. Like I would have actually liked to work for a smaller company. Like I, I went for a couple of jobs and unfortunately the pay was a lot lower than that. But I did like smaller business because at least you're exposed to everything and your difference makes a difference as well. If you work for one of these giant corporations in the towers, you're a clog doing nothing. You're a number basically. But yeah, the mindset difference was it's just extreme risk every day compared to this beautiful safety net where you can work at 60% and probably still get promotions every 3 years.

Kirsten Scott24:13
And I mean, in the back we were talking about risk a fair bit. Can you share a big risk that you had, that you've taken that ended up with a big reward?

Scott O'Neill24:28
Probably 2017, I switched the business from residential to commercial. So I've worked out like the strategy with residential wasn't actually making people retire. Like, yeah, they're building portfolios, but they're not retiring. They're just accumulating debt and assets and hoping in 10 years it doubles in value. So I decided to move it to commercial, and it costs us a lot of money because no one wants a commercial. Like, we were doing at the time on average 45 residential deals per month, which is pretty good revenue, and then it went to like 5 commercials. But I didn't care because there was a long-term pitch of, well, number one, the product's better. There was zero competition. There was no such thing as a commercial buyer's agent at the time. Um, and this was at the time when the residential buyer's agent industry was exploding. Like, there's probably 20 when I first started. There'd be somewhere between 5,000 and 10,000 now. They're everywhere. So I saw that wave coming and I went, look, if I pivot now, it's going to cost me for a year or two of revenue, but long term we'll be the first and pretty untouchable. And We're by far the largest commercial buyer's agent, like by a factor of 5, I'd say 4 or 5 at the moment. If we stayed residential, like we'd just be one of the, one of the lot.

Kirsten Scott25:40
And so sometimes you have to take a couple of steps backwards to take 2 steps back, take 3 steps forwards. And how long did it take for it to come start coming back? Like, were you sitting there nervous for a while?

Scott O'Neill25:52
Well, this is a good one because I had the property portfolio, so I made my money through property first. So I was an investor, I always had that safety net. So I didn't really care too much. I did care, but it wasn't like, it wasn't doing anything other than not growing my portfolio by not having a business. Like we were fine. So yeah, it took 2.5 years to get back to the same level.

Kirsten Scott26:13
And I guess, is that what then inspired you to help other business owners de-risk the business's performance by building a property portfolio? I mean, you've built a, a property portfolio of over $150 million in value and you did it in a very short period of time. Is the security that the income, even obviously before it was that big, but the income at the point you were saying, is that kind of what inspired you to help other business owners particularly de-risk themselves?

Scott O'Neill26:44
So I remember when COVID hit, like the portfolio was clearing after mortgage, after costs, like 7 figures. $1 million plus. So it was basically a really good portfolio. COVID hit. And then I remember how like relatively calm I was. Like I literally, I've worked out the cash flow and I said, I can keep all my current staff assuming no revenue for 19 months. I did the calculation. So then we fired no one. And like we didn't know that COVID was gonna turn into a property boom at the time. But I think by April, May, it was back on. Hard. Everyone wanted property at that point. So COVID turned out to be brilliant for property, but it was 3 or 4 months where it looked like the world was over. And even though that like my tenants were still paying because these are supermarkets, these are industrial properties, they were all still working, medical type tenants, pharmacies. I had a couple that weren't paying like, but that was a 2-month period. But having the safety net changed how I operated as a business. Like I didn't, Yeah, I was just always a bit more calm. Like that's where the risk side didn't feel like risk because there was a safety net.

Kirsten Scott27:49
Yeah, it would be nice to have a nice safety net. I guess that's the dream of every business owner, to have the freedom to build your business and take risks while having some security. It might not be covering you, you know, it might not be equal, but at least you've got that security. Then can you tell us the— so when, when as a business owner, when do you start? This process of building that property security? At what point in the business, the business's lifecycle?

Scott O'Neill28:20
Yeah, so good question. To answer that properly, like number one, you've got to have clear cash flow. This is spending money. So everyone's business will have a different return. You know, your margin might be 30 or 40%. So the margins you're going to get out of commercial, I'll tell you rough numbers. So if you get a 6% yielding asset, 65% leverage that, at a 6% interest rate, you're basically, you're getting a 5% return, pure cash flow only after debt. If that interest rate drops, that's gonna jump. But if that property grows at 5% per annum, works out to be 16% return on your equity you initially invested. That's after mortgage, that's adding the capital growth to it. If you get 7%, works out to be 21%. So you're going to get about 15% to 20% return on equity. So if your business does a lot more than that, then you don't just pile all your money into that. You're better off keeping it in the operations of the business. This is a diversity play. And then you don't want to just diversify for the sake of it because this is what all bad investors do. They just do it on the side and go, I need a bit of that, need a bit of that. And you just blend your return and you're like, you might as well just buy into a blended fund that way. This is a very safe way of getting 15% to 20% compounding return. And it's a good way of kind of parking your profits up. A lot of businesses don't want to just expand indefinitely because that increases risk. There's good things about that, increases your business multiple and things like that. But we don't just want to, you know, you want to focus on your business first, number one. And then if you've got free cash flow, commercial is a way of, you investing without it compromising your cash flow. Because if you park it all in residential, you're gonna find you've got more pressure because you've got negative debt and that's, you know, interest rates.

Kirsten Scott30:07
So it's scary to have more debt.

Scott O'Neill30:08
Yeah. And it'll change how you operate as a business owner too. You'll take less risk, you'll spend less on marketing, you'll, you'll be more in your shell a bit. And that's, that's not a good thing as well.

Kirsten Scott30:18
Now before we move to the Q&A, I just wanted to ask one last thing. What advice do you have? It's in relation to having quite a large company that has multiple companies in it. What lessons can you share with us on how you manage your focus and how you're able to have companies operate without being involved basically in the operational side of each business?

Scott O'Neill30:45
Yeah, so I think the larger it gets, the easier it gets a little bit because you just got better people in place. You build systems. And work with good people. So that's the real, I guess, strategy. So, you know, talent finding has been pretty good in our industry because it's kind of like, you know, I've got a legal business that they struggle to find talent. Yeah. Accountants, forget it. There's no new accountants coming through.

Kirsten Scott31:12
And they're all poaching each other too.

Scott O'Neill31:14
Exactly. So it's harder in different industries, but like buyers agent, renewable energy, like there's talent coming there quick. AI is the new boom, but there's not enough AI engineers out there, so they're getting huge salaries. So, like, you know, finding talent's the big part and then just having the right systems. In terms of the focus, like, my advice is always just think where you want to be in 5 years, you know, and that's like, have a goal. Like, a lot of people don't think, what do I actually want in 5 years? And then aim for that goal. And then remember, as you're going towards that goal, most happiness you get is from moving forward. It's not achieving the goal because as soon as you get that goal, you're on to the next target. So there's a lot of business people on the internet spooking, like, you know, whatever it is, like, just never go out, like, for 5 years, buckle down, like, live this hermit life and just get your business through. And that's wrong because you're going to give your best years away. What, you're going to be 10% ahead for doing that compared to having a balanced life? Like, I had a balanced life. And I enjoyed the process. And like you hit the goals, you're actually empty. Like it's kind of a little bit, that's the crap part of hitting a goal.

Kirsten Scott32:20
You still feel behind because you got new goals.

Scott O'Neill32:21
Yeah. So, but the journey is really important. So just enjoy the ride. You've only got one of these.

Kirsten Scott32:27
And what about advice for people going through that early stage of the business? You know, the first 3 years when you do probably have all hands on deck, you're doing big hours. There's a lot of like, oh, let's do it. Like, there's a lot of— sounds like the office is about to snap in half. What is it?

Scott O'Neill32:46
That's me moving.

Kirsten Scott32:46
Oh, please. And now you made me forget my question.

Scott O'Neill32:53
Thank you very much.

Kirsten Scott32:57
Yeah, the first 3 years, sorry, there's a lot of doubt. Like, you know, for Kav particularly, The first 4 years were really hard. I was still trying to figure it out.

Scott O'Neill33:08
It's not working.

Kirsten Scott33:08
I can't figure, I can't do this. You know, that initial period, what advice do you have for people going through that period in how to handle it and how to move to the next stage?

Scott O'Neill33:18
Well, look, it's always the hardest by an absolute mile. So like I always think not everyone's built to be an entrepreneur. Like there is this culture at the moment where everyone needs to be an entrepreneur. Like you just, You got to be a little bit of a psychopath, I think, to like this. It's different. And if you're not, you like— I think you got to be extremely competitive. Like, if you don't want to beat your competition or, you know, just somehow get one up, you will fall behind. So you're up against those types of people that would do all sorts to beat you. So, you know, think about that. But if you can get through those first few years, then it does get easier.

Kirsten Scott33:54
Always.

Scott O'Neill33:55
You know, you've just got more people, you're spreading the risk, you've got more revenue. So if a certain client or part of your business fails, you know, it's only a smaller percentage of that revenue, which doesn't hurt you as much.

Kirsten Scott34:06
Totally. I completely agree. Can we give Scott a huge round of applause, please?

Scott O'Neill34:10
Thank you.

Kirsten Scott34:13
Now I'd love to open it to open discussion. So who wants to kick off first with an initial question? Please. Is it better to buy a commercial under your business or your personal? Good question.

Scott O'Neill34:30
Good question. And it has different implications on lending. So I would say talk to your broker because depending on your business or your structure, you might get a 50% LVR compared to like a 70%. So you'd want to kind of maximise your debt for good property. A lot of people go, oh, do I buy a buy my premises. I'm actually like, I've just done it, but I've always been against it because I don't like having all your eggs in one basket. Like if you buy a warehouse and you've got a, I don't know, some kind of manufacturing company and then you outgrow that, you kind of then like you're just all stuck in one spot. And it actually, if you ever try sell a business, a lot of companies buying your business don't want the property as well. So you, or a partnership breakdown. You know, they've got to, it just makes it more complicated. So sometimes it's better just to invest completely in the other side of the country, nothing to do with your business in your own name. And it's a little bit separate that way.

Kirsten Scott35:25
And can you talk a bit about the tax implications as well of purchasing through a business and outside of a business?

Scott O'Neill35:32
Yeah. So you do pay GST when you buy on your, like say adds 10%, you can claim it back, but it is harder to lend. There's more taxes, there's, yeah, it's basically easier to do it on the side. So whenever you buy a non-going concern asset, which is for your business, you add 10%.

Kirsten Scott35:50
And what about the benefits though? The tax benefits of buying through commercial?

Scott O'Neill35:54
Oh, it's all like the income, like you can kind of—

Kirsten Scott35:57
It's pre-income tax money. Exactly.

Scott O'Neill35:58
And then you can actually influence how much rent you pay yourself as well. So that could be good in your super. So you can play games that way, but then that's reducing the income on your business. So is that worth it? Because that might hurt your valuation or your profitability. But yeah, you can tinker around with it a lot. So yeah, a few things there.

Kirsten Scott36:17
Does that answer your question? Do you want to go more detail on something? No, no, that's fine. Thank you. No worries. Thank you.

Scott O'Neill36:24
A couple of questions.

Kirsten Scott36:25
Loud one.

Scott O'Neill36:25
Yeah, sorry.

Kirsten Scott36:26
A couple of questions.

Scott O'Neill36:27
First one, do you offer equity in your other businesses so they manage and stick around? Longer because you don't play the operational role? And secondly, why did you venture, start venturing out into New Zealand? Two completely different things. I'll start with the New Zealand one. I was going to go there in 2021 because I knew there was no competition. Because we've sort of reached what I think our limit is in Australia. We probably have about 50 to 60% of the market share in a tiny industry, by the way. But you can't get more than that. So we're, it's ours to lose. But I was, this whole market, it's only the size of Sydney, there's 5 million people there. So it's not huge. But the reason I didn't go in 2021 is the yields were terribly low and the interest rates were higher. But then since then the interest rates went sky high because of what happened in COVID and they had a really bad inflation problem there. So they went up to like 7, 8% and that destroyed the commercial market. Pushed it down 30%. In that time, rents were growing and then interest rates started dropping. So it's the perfect storm now for New Zealand to have really good returns. Like if you want to make easy money, it's commercial in— because you're buying at a 30% discount at a cheaper interest rate than Australia right now. Plus yields are better than we've seen for nearly 10 years. So really good, really good storey there. And there's no competition. So we're doing a lot of volume in a little market. So that's— Borrowing works the same way? You borrow through— Yeah, it works out to be about 10% less. So instead of getting a 70% LVR, 60% will be your max. It's quite, there's a treaty between us, like they've got the same banks as Australia. It's like, I don't know why more people aren't interested. It's kind of in the too hard basket. Everyone, even my clients that might have 10 commercial properties, I say, look, go buy an industrial property in Auckland. It's blue chip, it's, you know, you're getting it below replacement cost and they just, I don't want to set up a bank over there. That's it. Like, it's just too hard. They're just lazy. But there's, it's like buying in Sydney for a 40% discount. Like, you're mad not to. But yeah, it's just too hard basket. I think that'll change in time.

Kirsten Scott38:36
I reckon I'd be one of those idiots. Oh no, I don't want to set up another bank account.

Scott O'Neill38:39
That's all it is. It's hard.

Kirsten Scott38:40
Bondi.

Scott O'Neill38:42
Your other question was equity. Yes. So different. It's different for different businesses. So like if I work with a broker and he's got an existing business, it's kind of a negotiation, kind of case by case. I'd have majority equity in all of them. And yeah, basically the model I've got is if I go poach a really good business owner, he's got an existing business. I need to know that I can make him more money with less share than he could owning 100% of his business. So if we do that, he wins or she wins, and then they're making more money, and then it's a Rethink company after that. So guaranteed leads, higher volume. We do all the marketing and systems and stuff like that.

Kirsten Scott39:27
So does that mean you approach existing companies, offer to buy them, rebrand them, The guy gets, or lady gets a payout. Yeah. They stay in the business and then you flood them ideally with more leads because you've got a much bigger marketing engine.

Scott O'Neill39:45
Mostly we build from scratch. Okay. But yeah, if there is a situation like there has been a couple times, yeah, we'll buy them out. So like an example that I'll do a lot of in the next few years is just buying out residential buyers agents because the buyers agent market's going the way of the sales agent industry. Started 100 years ago with all these little individuals, and then there's a few big ones that come out of it— the Ray Whites, Ray and Hornes, Colliers, that kind of stuff. So it's harder for an individual to compete against a big buyer's agent now. So there'll be a handful of very big buyer's agents, we'll be one of them, and then there'll always be the corner, corner shop type buyer's agents around, but they're the ones we'll acquire, or, you know, sometimes they just come and work for us for the guaranteed lead situation. So Yeah, different for different industries.

Kirsten Scott40:32
And so the structure that you run your businesses in then, so you'll have an operating partner, someone who has equity in each of the 8 businesses and they operate that business and you maintain majority share.

Scott O'Neill40:43
Yeah. And they're the subject matter expert.

Kirsten Scott40:45
Okay.

Scott O'Neill40:46
You know, I'm not a lawyer, they're a lawyer type of thing.

Kirsten Scott40:48
And that's—

Scott O'Neill40:49
but we will guarantee them 100 leads a week or something like that.

Kirsten Scott40:53
Because you have the clients coming through the other businesses. Yeah.

Scott O'Neill40:56
Exactly.

Kirsten Scott40:57
Next question. Yeah, brother.

Scott O'Neill41:00
I've got a question. Um, so you mentioned that there was a couple of years, um, where you basically had the same income, where you had to take a hit to, you know, before going forward again. Um, but you also mentioned something about your portfolio, like, being able to, like, grow. You're sort of comfortable that you can still grow it.

Kirsten Scott41:18
But isn't—

Scott O'Neill41:19
like, I find there's a correlation between your income with how much you can borrow versus like growing your portfolio. So how important is it for you to see an increase, like increasing your income and increasing your portfolio? Oh, massively important. So I couldn't grow at that time. And so the other time you can't grow is when you start a business. So if you have a good paying salary job and then you move, forget trying to buy in 12 to 18 months' time. So yeah, I didn't buy for a few years. Like, and I bought a house to live in at that time too, which is in Sydney that I was, yeah, finished. So I didn't buy for 2 years at that point. And yeah, the business slowed up as well, which wasn't a bad thing. Like, you know, again, when you've got enough, like I'm not buying properties anymore just because I think we've got the critical mass. They're not, it's just creating more volume. Like we've got full-time property managers and accountants dealing with it. So if I, buy more deals, it's just gonna get messier for no lifestyle benefit. So, but yeah, moving forward through business income is, that's kind of how everyone in this industry works. Like the buyer's agent industry, they might have a couple properties at the start, then they'll have a good business and then they just park the capital up in that method we just mentioned and then build big portfolios, which is something that you just gotta be aware. Like a lot of these people promoting, let's buy 100 houses. And there was 100 crappy, you know, things in regional parts of Australia, that's not going to make you retire. And it's actually getting supported by their business income. So yeah, it's a, it's a risky strategy to tell the mums and dads of the world to follow, I think, unless you've got the business.

Kirsten Scott42:57
I think it is also important to highlight that when you start a business and you've left the security of your full-time job, that the banks aren't going to give you any money. Yeah. For a while. And that's something a lot of people don't think about when that happens. Next question, please.

Scott O'Neill43:16
So congratulations, but with you vertically integrating your business, what were the biggest challenges? And then for you removing yourself, maybe that's before, like removing yourself out of the operation, what were the biggest challenges? The business is growing at different speeds. So like we had a meeting today, like the finance grew, or no, the insurance grew at like 250-odd percent. The buyer's agency grew at like 130%. The other one grew at like, the renewables has grown well over 1,000%. So they're all growing at different speeds. And what that does is create service issues between them. So if you destroy the lawyers, which we've done many years where they don't have enough capacity to deal with it, then that causes problems down the service chain. And it's the same brand too. So we all look bad. So that's why we created the Rethink Group. It's created that ecosystem where it's centrally managed and we can then kind of be, you know, we're managing it always. We know exactly where the problems are and then go, you need to staff up there. We need to slow marketing up. Which is a death sentence for a business. I hate doing that. You don't, you know, that's the easy answer, just stop marketing. But like, you know, that just shows you you're incompetent in business sometimes. You got to actually get the business sorted for the marketing. So we were quite proactive there. Yeah. And removing yourself out of the operation, how'd you do that? It was hard to start because you got to pay a high percentage of your profit share to to others. So like, let's say I was doing a $10 million commercial property, like we charge 1.9%, there's $190 grand income on that. Then if I give that to a buyer's agent, then he's gonna have a percentage of that. Whatever the percentage is, it's large enough to have a pretty big impact. So you naturally start, like, I'll give all the little deals to everyone else, but that's not gonna keep them happy long term. So at some point you gotta go, alright, I've gotta be, happy to scale this and make the same money even though the revenue might be 3 times as much. So that's what happens. So your profit margin drops. We were sitting at 60 to 70% profit margin for many years and then that, you know, went down to 30, 40. Yeah, exactly. It costs money. That's all it is. But the idea is you can do more revenue and, you know, more revenue, less share of that. That's, that's low risk, actually. Please, Scott, with, with the blue chip assets you talked about, entry points. Yep, I've heard you speak about entry points. Ideally you'd want to have somewhere around 1 to 1.5 cash. Is that still what you're for? Blue chip? Yeah, like that's plenty. You don't want to play around in those small sort of commercial assets. Yeah, so when I first started, entry level was like 150 grand cash. And you can buy a pretty good property in like North Brisbane or outskirts of Sydney or wherever. But now everyone wants commercial because cash flow's harder to get by and there's more education, et cetera. So we've got a minimum of about $400 grand cash just to even like want to, like we don't wanna work in that price point 'cause it is higher risk. And there's, unfortunately that's where the majority of people are. But the good deals start like probably $2.5 mil up. So that's your $1 mil, $1 mil cash or equity. But you're getting a big freehold deal. Like that's a big shed. That's like we bought one in Perth today, it was 1,300 square meters. Like we bought it below replacement cost, 2,000 square metres of land, 5 Ks from the city. Very good deal that one. That was 2.1. So they're out there. They're just getting harder to find. Yeah. In that $1 mil, call it, cash or equity.

Kirsten Scott47:02
Yep.

Scott O'Neill47:03
What would your advice typically be to a client? Would it be go back into resi? Let's say they had $750,000. Would you go still into a resi or would you try commercial with a bit of extra cash? I think you're in the ballpark for commercial. Like if you're under $500,000, yeah, resi all day. Just buy 2 or 3 houses, leverage up, let the market do its thing for a few years. But the other option is, Syndicates as well. You can go into portion, you know, own a portion of a larger asset. So commercial's gonna have a very good few years because interest rates are, they're dropping. A lot of the recent drops haven't flowed through to the current market. So there's kind of a lag effect of growth yet to hit. And it's almost like the residential market, there's like 600-odd trans— 600,000 transactions per annum. And you know, there's 30,000 in, in commercial. So even if 50,000 of those resi guys come over, that's going to massively increase the demand on the commercial field. So that's going to create growth. It's demand over supply. So I think it'll get very good growth just because of the amount of people trying to get access to it. They're going to squeeze the yields down. That's called yield compression. So if you get, if you benefit from that, you will get good capital growth. So it's almost not a cash flow play. It's a growth play if you buy the right asset. But yeah, look, Anything above $700,000, yeah, you're in the game, I'd say. And then by the time you find a deal, you might be able to come up with another $100,000 or so. Or there are lending products out there that can go up to 80% for commercial for a higher interest rate. So there are options.

Kirsten Scott48:35
How important is it to have a really good, like, mortgage broker or finance broker?

Scott O'Neill48:40
Oh, it's a game changer because most resi guys will say they can do it, but then they learn on the job. So a good commercial broker has the right contacts in the bank. They know the policies off by heart. They know that's best for medical lending, that's best for regional properties. Like you need that expert because it is different. It's like it's a game of finance, probably. Like if you don't play that game good, you're either going to leave stuff behind or get it wrong. And that's where you'll just, you know, You wanna own as much properties for as long as possible and that's how the banks will help you do that.

Kirsten Scott49:14
We've got time for one last question, guys. Nope, we're all good. Oh yeah, please take it.

Scott O'Neill49:23
Least doc loans.

Kirsten Scott49:24
Yep.

Scott O'Neill49:25
So let's say someone's got the cash.

Kirsten Scott49:27
Yep.

Scott O'Neill49:27
But the serviceability is not as strong as what it should be. How hard is it to get a lease doc in today's market? A lot harder, but they're getting easier. So lease stocks are kind of like almost cyclical, like they go up and down depending on bank policies. So they're coming off 'cause higher interest rates, the, you know, 1.5 times interest rate cover that you needed to hit was much harder to get. So every time there's an interest rate drop, lease stock loans benefit massively from that. So benefit from a lease stock, just so you know, like you, you could buy a property if you've got terrible business financials, like maybe a tradie who's just done all cash jobs, he's got a million in cash, and then you basically want to buy a commercial property, you can do that because the loan is based off the rental income on the commercial property. So you don't need to show your financials sometimes. There's no-doc loans as well. That's higher interest rate. But yeah, a good mortgage broker will explain it a lot better than I would. But I've done lease doc loans. That was the first property I bought after that bad 2.5 years. I just skipped the queue and just paid a bit higher interest rate. Got me into a deal. And then the idea is you get off the lease doc as quick as you can. So you might just, the good thing about lease doc loans is like you buy—

Kirsten Scott50:37
Can you explain what a lease doc loan is?

Scott O'Neill50:39
Yeah, so it's basically you have a million dollars cash, you have no servicing, but the income on the property might be $200 grand. The bank will look at that $200 grand and say you need 1.5 times interest rate cover. So you need $300,000 ability to cover that. And yeah, they'll lend off the, I guess, the income ratio basically. So more or less depending on the yield. So you want a high yielding deal. Your ratios are probably 50 to 60% at the moment. They used to be 65. But yeah, it's a good way to lend if you don't have the serviceability and you want to get off it because like, and you will get off it too because the commercial properties grow in value. So naturally your LVR reduces if your million dollar property turns to 1.2. You know, that's $200 grand of equity that can go against the loan and you can maybe shop around for a better loan product at that point, even if you're not earning more. So short-term solution to get in.

Kirsten Scott51:33
Scott, thank you so much for your time today. And thank you all for taking the time out of your day to come in and join us. And I hope it was a valuable use of your time. And I would also encourage you to come and have a quick chat with Scott. If you had any questions, you want to talk further. But thank you once again, and thank you all for coming out.

Scott O'Neill51:53
Thank you.