Lessons Learned The Hard Way
Investing in student flats has been a rollercoaster ride for Palmerston North investor Shane Storey, writes Joanna Jefferies. Photography by Brendan Lodge
1 August 2019
When it comes to property investment journeys, Shane Storey’s is in part, a cautionary tale. At 25 years old, the Massey University student owned 12 seven-bedroom student houses in Palmerston North. Only two years later the pressure from problems relating to his portfolio landed him in the hospital coronary unit, with a stress-induced heart condition. He was close to bankruptcy.
The Waikato-born investor and accountant grew up on the family farm and following high school, and an 18-month stint farming, he enrolled at Massey in 1988 to study business and accounting.
It was there in Palmerston North where he made his investing debut: he and his then-girlfriend couldn’t find any accommodation so they used their interest free student loans from the bank as a deposit for a threebedroom house.
They’d seen a friend convert a garage into two-bedroom accommodation at another flat, and decided to do the same at their place with the aim of upping the total rent. They also converted their dining room into a bedroom.
“We went from a three-bedroom house to a six-bedroom house and the flatmates paid all the bills,” says Storey.
The success of this operation meant they were able to continue growing their portfolio and for six years they repeated the pattern of buying older character homes in central Palmerston North, and renovating them to increase the number of rooms, achieving excellent returns.
“What you could get on a per room basis for a three-bedroom house you could get on a per room basis for a seven-bedroom. So you could double the income with not much more capital outlay,” says Storey.
One particularly good deal came in the form of three central Palmerston North sections that were up for auction. They had sat empty for 11 years, were subdividable and could take six houses.
“I said to the auctioneer, can you put up all three sections at the same time? He didn’t think there was any interest so he said ‘Yeah, sure’. I also said to him I would pay 10% deposit today, and the rest in three months’ time.”
The auctioneer put the sections up as a package deal, unfortunately for the late comers who wanted to buy only one section.
“They bid up to $40,000 per section but then there were no more bids. So I got [essentially] six sections for $20,000 each.”
What no one realised was Storey couldn’t give the cheque to the auctioneer until after 4pm because there was no money in his bank account. Frantic phone calls to backers ensued and he ended up using his Visa card to pay for the deposit.
Once he took ownership he wasted no time in bringing old houses onto site. He had them moved off farms and worked with the house movers to streamline the process.
“I learnt to disconnect all the cables and wind them up before they cut up the house, so I used to work quite closely with those crews.”
He went to second hand auctions and bought materials and paint, including 750 metres of three-year-old commercial grade carpet for just $1,000 – “I never had the heart to tell the tenants it came from a funeral home”.
His resourceful attitude was key to the success of the operation: he renovated much of the six houses himself by spending time with various tradies learning their skills, and transformed each place into a seven-bedroom flat.
But his “student holiday job” as an investor-cum-developer-cum-property manager was taking its toll. At 25 years old he and his girlfriend had 12 student houses and $1 million of debt.
Storey says at the time the Student Association at the University was “quite active with the Tenant’s Union. I became a target, because at 25 [the perception was] I shouldn’t be owning all this property. Noone realised how much debt I was in.”
Storey says the Association was telling tenants that fixed-term tenancies were not legal and they could walk away from them with three weeks’ notice.
A large amount of rent arrears was becoming a big problem and Storey ended up taking 400 cases to the Tenancy Tribunal over a period of five years. It was a very stressful time.
“The banks were closing in on me so I had to push the tenants to pay what they had contractually signed to do. And the courts backed me up if I presented the case the right way.”
But despite winning many cases, at 27 years old the pressure finally got to him. He had a cardiac episode and decided it was time to make some changes.
The relationship with his girlfriend also broke up around this time and because the market had moved they were able to sell down their portfolio. Storey kept only four houses.
A Career Focus
While Storey was still studying at university he had been working part-time at an accounting firm. Storey says the owner of the firm was convicted for fraud and following this “40 clients came to me and said: ‘Can you get us out of trouble with IRD?’ And that was the basis of my accounting practice.”
Storey & Associates became his primary focus, and for seven years he worked on stabilising his finances.
Over that time he built the practice up to 15 employees, but has since scaled down to five.
He re-entered the investment market in 2005, buying three properties in his favourite student spot in Palmerston North: only 10 minutes’ bike ride from the university and walkable to the CBD.
One of those houses unfortunately burnt down in August 2012, but the veteran investor had been through enough to know it was an opportunity rather than a curse.
In five-and-a-half months he was able to truck a new house onto site and at a total cost of $350,000 it now pulls in $700 rent per week.
Students For Clients
Storey certainly ruffles a few feathers when he speaks about his student client base.
”What I care about is the cashflow and I will do whatever it takes to keep my house full. So, then I need to find out what do the tenants actually want? What will they pay for? It’s a business decision and I treat it as a business.”
He’s discovered that along with proximity to the city centre and university his clients want large bedrooms with wardrobes, and a place that’s warm, dry, clean and quiet.
He’s spent $15,000 in recent years upgrading his six student flats to the new required level, but doesn’t begrudge the way some of his tenants treat the houses.
“They’re 18-25 year olds. It’s the first time they’re out of home. “That’s the age group – this is not a house that you and I would live in – they’re teenagers. [At that age] you have your parties, you get up at 10am and you’re up until 2am rushing through your assignment … that’s just the way they live.”
As such, Storey has seen it all – from clothes drying in rooms causing mould, to indoor marijuana crops, to a tenant erecting a forty-foot flag pole, to 23 holes punched through a single wall behind a couch.
But Storey says the market in Palmerston North has been changing due to falling student numbers.
“They are getting pickier and they can get pickier.”
He believes this will continue for another three years, but it will reverse in three years’ time and cause a “housing crisis for students” due to the higher numbers now coming through.
Storey has four daughters, and currently his eldest is attending Massey and flatting in one of his houses, giving him amusing glimpses into student life – such as when his daughter’s slippers got stuck to the sticky bathroom floor.
On the work front he’s currently involved in creating an interest rate calculator using an algorithm that is based on population data.
Property investment-wise he and his family are consolidating, collecting rent and watching the market.
He believes Palmerston North is a seller’s market because there’s been 400 new jobs created in the city, which has created demand for 600 houses.
“House prices are in the process of doubling. They’re already up 60%, there’s another 40% to go.”
However, he has made one significant change to his investment business: he now uses property managers.
As a result of pushing himself beyond his limits in the past he no longer deals with all those late night plumbing issues, or police call-outs to parties – or Tenancy Tribunal hearings.