Pizza and Property Podcast by Todd Sloan

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Podcast Transcript

Todd Sloan:
Would you mind actually just letting us know a little bit about yourself, your backstory and sort of what's really led you to where you are in the property space today?



Vaibhav "Rasti" Rastogi:
I started as an architect, an undergraduate qualification. But then there was a change of circumstances, so I moved to a bigger industry with payday loans, the IT industry, which got me to places from India to Singapore and then to Australia. I always had a passion for making money work harder for us. Coming from a very humble background, I realised that a large number of people work very hard to put money on the table. So that actually got me going into the development side of things and I was doing pretty well there. So I realized that ‘this is great, what I'm doing, as an IT sector but I really wanted to get into the fund management space, so I quitted that, did my full-time MBA, went to the US, came back, joined a job in IT and started earning money which was awesome. Meanwhile, I was using my skills in property investing which got me going and I created my portfolio. And it was 13 years ago, in 2007, when I quitted my IT job to start my full-time MBA in 2008.

Todd Sloan:
What took you from there then?

Vaibhav "Rasti" Rastogi:
So I was there until late last year and what got me going was that I was enjoying to the money management, I was managing money for corporations. And what I did, meanwhile, as a side hustle, I started investing in properties, using architecture at my highest to evaluate the properties and also the research that in my investment role was vital, I did all of that, to build my portfolio on the pipeline. That got me going and I was able to build a portfolio very quickly. And I realised that this is what I really wanted to do, as a profession. So lastly, I quitted my fund management role and I started my own buyers’ agency, which would help people build their wealth by investing in properties. And at the same time, it's very rewarding because of the value I can bring to individuals.

Todd Sloan:
What is your take on what risk actually is and how you can define it?

Vaibhav "Rasti" Rastogi:
Yes, to me there are a few various definitions of risk, but the key ones are more around the risk of unknown. So, when we don't have certainty about it it's going to affect production, call it volatility, or on unknown things that might happen. So, typically, we know what we know, but we don’t know what we don’t know. But knowing what we do not know, is an appreciation of the risk. It’s more of what we know and what we are aware of. There are always some unknown, that things might go wrong. For example, in this year, nobody knew that there will be a pandemic like COVID that would hit the whole economy globally like that. So nobody, no fund managers, would actually model the scenarios until it actually started hitting it. So the Murphy's law says that "anything that can go wrong will go wrong." So, how well we are prepared to take that risk on, is our capability to manage the risk. However, I should also define that, it's not really always the downside risk that people take on more of a negative connotation to that. It can also be categorised as upside, just like surprises, which we all love, but not always. We don't like all of the surprises, we only tend to like the good surprises. And exposing ourselves to them is all taking it up. So, in simple words, unless and until we buy a $10 lottery ticket, then only we have a chance to win the jackpot. Of course the chances are not in our favour, because there are high chances and high probability of losing $10. But unless we buy that ticket there is no likelihood that we can win that jackpot. So, to me risk is two-fold, downside and upside.

Todd Sloan:
What am I actually risking by not taking this decision by not buying that investment?

Vaibhav "Rasti" Rastogi:
Whenever we are investing, we are taking on two things. One is the opportunity to make it work for us. So I feel like there might be upside potential or expected returns. But at the same time, it comes with the risk that it can go up, or it can go down. And this is the thing that I actually find in the investment thesis, is that unless we are exposing ourselves for the expected return, we are focusing on avoiding the downside, we are actually setting up for no action.

Todd Sloan:
Having worked in the investment management world as a portfolio manager now and managing significant amounts of money, what's the lesson on risk that you did really learn, for example, was there a real key takeaway for you?

Vaibhav "Rasti" Rastogi:
From the investment world that I am coming from, the key takeaway is that risk and reward go hand in hand. Unless and until we take a risk, we are not really setting ourselves up for that reward. And every estimate in the financial world has two aspects of it, like different volatility, or the risk that we are talking about expected returns. We are actually rewarded more for the risk that we take. And the good thing about how I have actually taken it from that industry to what I'm doing now, as a strategist, is to think of it more as a portfolio then. Every property of what instrument or what asset we are buying can be assigned a specific role. And do it more of a portfolio we can't really control what will happen to the returns of that asset, but together as a portfolio, we can choose to put together the portfolio in a way that is more favourable than otherwise.

Todd Sloan:
So are we talking more around diversification then?

Vaibhav "Rasti" Rastogi:
Diversification is certainly one way. The other way is more about how we go about putting things together in a certain way, which it should match with the person’s circumstances. So it's going on a bit of a strategy thing that I talked about, where it’s about where the person is today, where they want to be, how much time we are giving that person to go from point A to point B and what is the likelihood of getting there. The risk management says that yes, we are recovered from something which might happen on the ways. Or is it something detrimental that we should stop of a journey? If that's the case and we have to be very careful because it's risk is very subjective as well, for example, what risk means for someone might mean something entirely different to another person. There's an example where somebody is happy to lose $100,000 because he's talking about billions of dollars. So he can choose to risk that much money. On the other hand, there is someone who is starting up and has struggled to collect that much money and that’s all he has as a percentage, maybe 100%. So, his capability of willing to take a risk is entirely different, compared to someone who has deep pockets.

Todd Sloan:
So is there some kind of blanket rule that you have as far as percentages for more high-risk allocation sections of the portfolio, or does that kind of modelling not really exist?

Vaibhav "Rasti" Rastogi:
Certainly, that is the case that we look at, however, the challenge is for someone who is starting in the portfolio industry or as an investment, the key thing is that it's not really like stock. If I have $5,000 I can choose to buy 5 stocks of $5,000 each. The first property with 100% allocation. So the risk in investing is a bit different from what we look at otherwise, in other words. Here it’s more about the ticket price, such as how much money you're putting in the first one and also the illiquidity risk over here. Like the transition costs are so high, they don't really get the valuation of the property appropriately or accurately all the time. So it's more about the cash flow like the sustainability of that property or the portfolio, people get together for the lead role and taking into account. While thinking that ‘this is my first property and I have to be very careful with the selection of that asset of the president of the stock. And what I'm buying, at what ticket I'm buying. What if something goes wrong over there? Do I have enough buffer for me to take that shortfall of cash if at all that happens?’ It’s about making sure that the property that I'm buying today, the first one, is good enough to multiply so that I can go back later on and extract the equity, and use it to buy another one. So, in property investing it's entirely different in an accident to an extent, but when it comes to the risk management side, when we are building a portfolio, that’s where it actually starts to happen, and we look at that, what we're looking at.

Todd Sloan:
Is there any tips for people to getting to know their own risk profile?

Vaibhav "Rasti" Rastogi:
So when it comes to investment, the base case that we start with is that when we are putting money, we are kind of forgetting it. In the sense that if it worked, it worked. If it doesn't, of course, it will come back. But that should be the mindset when you're talking about putting money at risk. Especially when there's so much leverage involved, we have to be very careful with what we are doing with the money. Of course, we are here to make a huge impact on that investment so that it will grow. But when it comes to someone, starting with money, they really need to be appreciative of what thing was wrong, or what is the potential upside as well. So it's going back and forth, back to the pain foundation that there's an opportunity for someone to make money. So, the essence is more about the research, what strategy one is using, what location they are choosing to buy in, what property we are buying and what sort of things that can go wrong. Then it's more about reducing the downside risk and exposing yourself for upside risk, as in an opportunity for it to grow. It's more about the cash flow, which is actually the pinnacle of property investing. The good thing about property investing, is that it's not really a stock or an asset which gets valued on a daily basis affects off. We know at the end of the day or even at the carrying or like what is the stock trading today, for example. With properties, nobody knows the value, until we put it on the market, or ask the valuation guy to come in and value the property. So the key thing with property investing is the cash flow. As long as we are paying the mortgage for the property, the bank is not bothering us about the mortgage and what will happen with the valuation, we are not really being bothered by the valuation person and unless and until we have over-leveraged or overcapitalised, we are talking about the sustainability of portfolio or the property that we're talking about. So for example, it might be a scenario whereby the tenant is behind the rent or I lose my job, the funder of the payments, which now creates the cash flow portals and they come into play. So the risk appetite is more around what the current position one is having in terms of the asset base, or security or proper does the ongoing cash flow.

Todd Sloan:
I think I'm picking up what you're putting down. So if you’ve got two different clients that walk in. One of them is a young lady who's done incredibly well in saving up and $100,000 deposit and wants to buy something, but her job is 60 grand a year. Then you've got another young lady that walks in a similar kind of thing, but she's got on a much higher salary because she earns 200 grand a year. So you are saying that you might have different kinds of risk profile, obviously, because for the lady that earns 200 grand a year, if something does go wrong or she can afford to maybe hold something that's more negatively geared, but in a potentially higher growth suburb but the other lady that's earning 60 grand a year, even though they've got the same amount of cash saved up.

Vaibhav "Rasti" Rastogi:
Exactly right, so the person who is on the lower salary scale has to be very conscious of the property cash flow for the same reason.

Todd Sloan:
Because if something goes wrong and she cannot hold it then you're looking at that from a risk management point of view and going ‘well there's only so long you can hold a shortfall for, given your income’.

Vaibhav "Rasti" Rastogi:
So, the way that we play around with that is that okay, instead of going for the need of getting a negatively geared property for her. We will be looking for more of a neutral or positive cash flow, so that her property portfolio or the property that she's about to acquire has not much dependency on her regular salary cash flow to obtain it.

Todd Sloan:
So looking at it that way then, is this something that you would generally do when you're sitting down with someone and they're basically saying that this is the kind of thing that I want to build and you've gone through their goals, where they are now, where they want to be, what they're prepared to do and all that kind of jazz, does it ever really change from the risk management side of things as to just the cash flow side, or is it sometimes actually around the areas that some people are actually more averse to than others and you take all that into account as well?

Vaibhav "Rasti" Rastogi:
Right. The way we define the risk profile is based on the willingness of taking a risk as well as the ability to take a risk. So unless and until the person is higher on both the scales of willingness and ability, then only we'll put that person in the category of a person who can take a risk. They are lots the people who might think that they can take a risk because they have that kind of appetite, but even though they have that willingness they may not have the ability to take it, because sometimes we don't know what we don't know. So I usually come in from a perspective where I tend to slow them down and that we should not only risk too much and that we should really build our buffer upwards and become more able to take risks. People tend to look at the cash flow and if it is a neutral cash flow property, then they think that all they need to do is just get the deposit down and they’ll become the owner of the property. But they don’t really ask themselves ‘What if something goes wrong? What if there's a bill from the council or something goes wrong structurally?’ Because even if we are insured and have done all the things that we should be doing in our capacity to mitigate that risk, there's still a scenario whereby we need to put some money from our pocket. So, we have to build that, not only the willingness, but also the ability, before they can do something and would gladly take the risk.

Todd Sloan:
Is there anything in the property space that you can put in as a bit of a hedge?

Vaibhav "Rasti" Rastogi:
For sure. Before I answer that, my strategy is not just limited to buying one property. My take is that one property doesn't really make an impact but a portfolio definitely makes an on one’s life path. And that's where we are thinking about property as a way of building wealth, and maybe even all the way to get financially free. So the key thing to me is that in long term, if we have done the right selection, the property value will go up if we really believe in the demography and the macro research of the country. The key thing that I'll talk about is how we can use the limited funds that we have today and multiply it by expecting the equity, very quickly, and then build up our portfolio infrastructure. So I'm not saying that you should go and buy six properties today. If you can afford to buy one today, a little admin and you should buy something because not really hurting too much of our risk exposure. And then at the same time, exposing ourselves in a way so that property value goes up later on, then we extract the equity. So, to me, the risk is more about, if we don't do the right selection of chasing the hotspot, the scenario might be that we have to hold a bit longer before we can go and extract the equity, from there. So to build wealth it’s all about capital growth that we can get out of the thing. However, people will always be pushed back by things from the serviceability perspective, and they think that if I can't really borrow anymore I’m actually getting stuck with my portfolio configuration, in terms of the growth of the portfolio. So we really need to slow down over there and buy a property in a way that actually allows us with our borrowing capacity and our cash flow becomes more important from a strategy perspective.

Todd Sloan:
Say for example that you got an opportunity to buy an asset, for yourself or for a client, and it's something that you’ll look at and think this has got potential here for some serious upside for capital growth, but it's going to potentially tap either yourself or your client out for ages like serviceability. Is that something that you then take a step back and it's potentially not worth purchasing?

Vaibhav "Rasti" Rastogi:
So, the whole thing is about how we can go and build a portfolio. Sometimes the opportunity presents very well, whereby the equity is already there in the property, for example, a property which is cheaper than what it should be, then, that's where the margin of safety can separate us from the investment industry as well, even if the market is volatile or expected to fall a bit, because we never know. Say for example, if COVID goes on for a bit longer but the thing is that creating the right demography market and understanding where the demand is. We have to pick those markets, which are more relatively safer than the others. So there are ways that we can find those locations where we can find a deal, which will have inbuilt equity, a margin of safety. Even if the market’s or the property's valuation goes down by 5% we are still above the water, because we bought at 18% cheaper.

Todd Sloan:
What would you say is the most common risk is that property investors face in the like this time that we're in right now?

Vaibhav "Rasti" Rastogi:
There are quite a few risks that we have to be conscious about. I think that in this environment when the interest rates are so low, the risk of overcapitalization is on the higher side right now. It’s the government's job to kickstart the economy by getting hampered, in terms of the grants of first home buyer and stamp duty relaxation and more. But we have to be mindful that that is the job of the government to kickstart the economy. But as an investor or as a homebuyer, we really need to see the limits, for example just putting 5% today, it can get me a property to live in, because there is LMI and whatnot. So, to me, it's more about being careful that we are buying a property for long term. So currently, it's probably overcapitalization which is probably on the higher side right now on an average basis.

Todd Sloan:
Are there any sort of departing tips that you've got on the risk management side of things for anyone starting out listening to this thinking, ‘I want to make myself as secure as possible and I'm building the portfolio?’

Vaibhav "Rasti" Rastogi:
Sure. One has to have a strategy, it's not about buying a property. If one really wants to make an impact on their lifestyle, they would have to think about a portfolio. And that's where the risk management things can actually kick in. So, not buying in the same suburb, in the same demography all the time, because there has to be diversification. But what you would talk about is just buying the first property or a property. But when we are thinking about portfolio, four or more properties, that's where the fun begins and it's such a good thing over there. So, for that you need to have a strategy, having good clarity on the end goal, what we're trying to achieve, and then building it up over there. Treat it as a business not just a side hustle or a way of parking money, thinking about the money sitting still in the bank not getting enough interest rates out there, and getting into the property market. This is not the right way of thinking. Treat it as a pure business and get the right team around them. Education is the key difference between successful investing and simple property investing. So, if one wants to grow their portfolio in a more secure and positive way, then education and strategy, are the key differences that will put then in a different category altogether.

Todd Sloan:
Okay, so it's not just about buying investment property while its hats off if you've done that. Though it's really about taking a step back and going, where do I want to go and how am I going to grow my portfolio to get me there, treating it as a business when you are, and educate yourself as much as possible. Any other final parting words of wisdom?

Vaibhav "Rasti" Rastogi:
All I can say is that property is one of the easy ways to build wealth, but only if done strategically right. We, as in Australians, are under-resourced and underfunded on average. For example, 3/5 people will be underfunded for them to live comfortably, even at the age of 65. So it's more about thinking ahead, putting it into your mindset so you think that ‘okay we need to do something because the biggest cost is inaction.’ If you're not setting up for the upside, because you're paying too much of the downside, you're not really doing us as a favour.

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