244. New Builds, New Opportunities With Harry Pontikis

Welcome to another episode of Professional Builders Secrets. In this episode, I interview Harry Pontikis from Chocolate Money in Australia. We dive into the recent budget changes and how they are going to impact builders and where the opportunities may lie with property investors. We also talk a little bit about the current funding environment and how that may impact your business. It's an interesting conversation and well worth a listen if you're building in Australia. This episode of Professional Builders Secrets is brought to you by Apparatus Contractor Services. Apparatus provides full scope, end-to-end QuickBooks Precision construction accounting and CFO services for residential builders. If you feel like you can't completely trust your weekly and monthly financial reports, or you feel like you're flying blind Apparatus Group will rebuild and operate your QuickBooks accounting system and give you precision construction accounting capability you can trust. Learn more at apparatusteam.com or on the APB Rewards partner directory. Welcome to Professional Builders Secrets, the podcast for building company owners who want to grow safely and securely. I'm your host, Will Blunt, and today I'm joined by Harry Pontikis from Chocolate Money. Harry, welcome to the show.

Thanks, Will. Great to be here.

Yeah, fantastic to have you on. Very excited to have a chat to you about what we're going to talk about today. For any North American builders that are listening, unfortunately, a lot of the content probably won't be suitable for your market, but still recommend listening to some of Harry's expertise because he knows a lot about the financial markets and industry in Australia and just generally about, you know, for businesses anyway. That's enough of a disclaimer. Talk to me about your company, Chocolate Money, and how you got into this.

Sure. So Chocolate Money has been specializing in helping builders and developers in the construction industry in general with their funding needs. We've been doing it since 2003, so we've been doing it for quite a while. I've got a credit license. Licensed estate agent, got a couple of other companies, you know, in, in all geared around the construction industry. And so my team and I are pretty focused on helping especially residential builders do what they do best and, and get, get out on sites and build.

And you actually spoke at our, at the APB Summit in 2023. I think we agreed on that year just before we got on there, but we both couldn't remember that far back. So, uh, One of the highest rated speakers. So yeah, no, it's obviously what your expertise and knowledge really is highly valuable to builders out there.

Thank you. I think you're being a bit kind, but appreciate it.

No, I mean, it's an interesting, I mean, it's not something that builders probably think about every day in terms of your, like the financial aspects of it, but it can make or break whether or not they can build homes for their clients.

It really can, Will. So you get top-notch builders and the thing that usually the most challenging for them is cash flow. So everything can go really well, but they run out of cash and the whole thing just doesn't work. The impact of builders going broke is, is massive. I think it's quite understated, not only for the builder themselves, but their subbies, their trades, their suppliers, their clients, their families. So You know, it really is a tough gig out there and it's getting a little bit harder, unfortunately. But hopefully we can make it a bit easier for them through this conversation.

Yeah, we're going to get into the budget changes that happened in Australia recently in a moment. It's obviously a hot topic and intrigued to hear your perspective on how that relates to builders. I was thinking of the flip side. You mentioned of the builders with their cash flow and things like that, but also the complexities and challenges of their clients actually getting funding to build can really slow down build processes as well.

Yeah, it really can. Quite often the builder will just say to their clients, "Oh, off you go, go to your bank and see what happens." And the bank may be quite strict or may not be open to lending for construction purposes at that point in time. So what often happens, Will, unfortunately for the builder, is their clients will get a reduced amount they can borrow. The client will then come back to the builder and want the builder to cut their margins and would want the Taj Mahal built on a budget price. So, you know, the poor builder is sitting there trying to make it work when the reality is the client really has gone to the wrong bank or to the wrong lender. To ask for money. It's not— may not be representative or reflective of the client situation, but more for the lender that may not be in a position at that point in time to lend for construction. So it starts from the get-go for the builder where they— the client's looking to save money, cut costs, but really wants the builder to build everything they possibly can and no change to the specifications and and it really sets it up for a bit of an uncomfortable ride for both the builder and the client. So my recommendation is getting the, the builders to get their clients to speak to a qualified and experienced finance broker, and that way at least the client will have the best opportunity to get exactly what they want rather than just going to their bank because that's all they know.

Yeah, yeah, that's a great, great bit of advice. And we'll dive into a bit more about Chocolate Money later, which is your company, and we can talk about, you know, the broking services you have. But back to the topic at hand, which is the budget changes that we've seen in Australia recently. And before we talk about the implications on builders, let's talk about property investors because there's a lot of chitchat out there in the market, on the news, everywhere. Everyone's seeing it at the moment. How have the recent budget changes impacted property investors?

Yeah, they've really rattled property investors, to tell you the truth, Will. It's the changes to capital gains tax and negative gearing have been the cornerstones to property in Australia for quite a few decades now. And the government turning around and saying that they are fiddling with them. In fact, they're not fiddling. They've just taken a chainsaw to them. Yeah, um, has, has really smacked property investors around a lot. Um, capital gains tax and negative gearing are the things that make losing money in property bearable for property investors. And, uh, the government— governments— many governments have said that they're never going to touch them, it's off the table. And including this government, by the way, they did say that it's just not a discussion point. They're not going to do it. So when the government turns around and says, we are going to do it, and you know, only kidding sort of thing, it does have the impact of property investors thinking, whoa, what's going on here? And not only that, they're still tinkering. So they announced the changes, and as recently as a couple of days ago, they're still making changes to it. So it really, if you're looking as an investor, if you're looking at property as your vehicle to build wealth, it's looking quite uncomfortable and uncertain. It's like you're trying to walk on quicksand at the moment. So it really has caused a bit of angst for property investors.

Before we talk about what the changes meant, can you just take me back to explain exactly what negative gearing is, why that's something that implicates tax benefits for investors?

Sure, I'll just speak broadly, but negative gearing basically means that if you have a property and you're renting it out and it's for investment, the losses that you incur for having that property get to be carried over and reduce your taxable income. Yep. Now the point is that you may have an investment property and carry the losses for a long time, but when you sell it, hopefully you make a gain on the sale and 50% of the gain was untaxed. That also is being impacted. So both sides of property investment have been smashed. Now I'm not going into the details because I'm obviously not an accountant. Even though I do have a credit license, it's talk about lending. And to tell you the truth, Will, that's what it was. Now what the changes are at the moment, we don't know. That's which is also making people very uncomfortable because the changes that are occurring as we speak and they are fiddling even with the big announcements, they're fiddling with those announcements as well. The bottom line though is the government is very clearly signaling that they want new properties built in Australia. So any benefits, so negative gearing, capital gain, gains benefits seem to be applying specifically for new builds, which is the key to our whole discussion, I suppose, isn't it? Where, you know, there's a lot of doom and gloom out there. And rightly so for many segments of society and for business especially, but maybe not for builders. So for builders, it actually does create an opportunity that other segments or even builders may be missing.

So essentially what you're saying is historically investors could buy any property and rent that out. And if they're making a loss on their payments versus the rent they're getting, that would be offset from their taxable income and therefore they would get a tax benefit there. But now that's shifting to only new builds rather than any property. Is that right?

Correct. Spot on, Will.

Good. Well, you explained it much more easily and simply than AI did to me before this call.

Oh well, AI is about 80% correct most times.

No, yeah, it gave a good summary, but I mean, at least it got me up to scratch before we jumped on.

Wonderful.

So talk to me then more about what the opportunity is for builders. There's more, there's an incentive to build more new properties. So naturally that just means builders might have more work, but how do they actually capitalise on that?

Yeah, so, um, I suppose we'll— a lot of people are commenting on is it the right thing to do, and it's unfair for the governments to be tinkering and to be changing. And all of that is— it is what it is, basically. And with the opposition party saying that they're not going to support it brings further uncertainty to the whole equation. So, you know, the government's clearly saying we want more houses built. And where it's already an industry under a lot of pressure, where the biggest competitor to most residential builders is the government itself. So I know I'm speaking from Victoria. In Victoria, the big builds are just draining all good trades and builders and everyone into the government projects. So it's already putting a lot of pressure on on the building industry, but there's similar challenges throughout Australia. So I suppose the fact that the government is, uh, is giving a very clear message of build new homes is something that builders can lean into. There's no point, um, getting upset about it. The problem about, um, pivoting, I suppose, if you're a building company, is The pivot to building new homes may not be certain. Again, the opposition party saying, ah, we don't support it. So how much do you pivot? When it comes to builders, I suppose it doesn't really matter if the opportunities are there, being able to focus and lean into the opportunities of new builds rather than renovations or existing properties or knockdown rebuilds. Is a pretty clear message, I think, for builders looking to capitalize on these changes. So the bottom line, I suppose—

So like a knockdown rebuild, would that be considered a new build? No.

No, it needs to be more than one. So build one— sorry, knockdown one, build two or three is not a bad strategy.

So duplexes and stuff like that would feed into it. Interesting.

Yeah, dual locks, duplexes, anything like that.

It actually— you kind of touched on it as well for remodelers or renovators that have probably, in some of the major cities in Australia, there's been a real shift towards remodeling homes, right? Because there's not a lot of space so that, you know, you think, how can we make this better? And I'm sure property investors across the country have focused on getting older homes, redoing them, and then that's how they make their money. But that sounds like there's not as much of an incentive for doing that now.

Yeah, I think you hit the nail on the head, Will, where property investors most likely won't be looking at that segment as much. Hmm. On a positive note, if you want to call it positive, that'll probably dampen the prices of properties significantly. Now I'm saying, you know, is it positive? Well, it depends on which side you're looking from. If you, if you're looking to sell your property and the property price is going to be dampened or going to drop, then then that's a negative. If you're a builder looking for your next project, your next dual lock, and you buy an average home and you knock it over, build 2 or 3, and you know, you can either do it for yourself or you can do it for a property investor or developer, then it's a good opportunity. So there's always two sides to every story. I think for once residential builders have a little bit of a, you know, the light is shining on them, on their side for once, which is great.

This may be out of your realm of understanding, but okay, if the opportunity is there for builders to work more with investors that are looking for ways to build new properties so they can get the tax benefits, how do builders unlock those opportunities? How do they find those investors that are looking for builders so they can be in the conversation?

Fantastic question, I love it. And it is definitely nothing to do with finance, but it's got a lot to do with finding good business advisors that can help the builders focus towards that market segment. So if the builder's traditionally done renovations or remodeling, then, and the opportunity has been identified as property investors that are looking for fantastic builders to help them do their dual locks or build multiple properties on one block, then the builder needs to ensure that they're out there and they're advertising to that particular market segment. What that means is they're Their website, their socials, everything along those lines needs to be geared towards the property investor that's looking to build new properties. The process and procedures need to be put in place to make sure that it's, you know, if you're building 3 or 4 homes on the one site, in many ways it's much easier than if you have multiple sites spread across the suburbs. But in many ways it's a lot more challenging as well. So understanding the implications of having a business that's focused towards multi-unit dwellings, building multi-unit dwellings, having an understanding that the builder is actually accustomed to working with property investors is a good option. Focusing on lead sources which don't provide— it's not a mum and dad looking to build just one. But it might be architects or drafties that will provide a funnel of inquiries for the residential builder. For people that are looking to build 2 or 3 properties on the one site is a good opportunity as well. So even though you're right, it's not finance specific, it absolutely— you need to make sure that on the face of it, anyone looking to the builder's business sees a builder that's more than capable of building multiple units on one site.

Yeah, my mind went towards partnerships as well. Like you were leaning towards that as well. I mean, like brokers and things like that who are actively working with investors across the country would be, you know, good relationships to have as well.

Definitely. So brokers, I don't know, usually Architects and Drafties, a good source because people, property investors will look at the outcome first and then worry about the mechanics afterwards. So they'll try and design and they quite often will lean on the builder to say, oh, can you come up with what can you fit on this site? So they'll try and look at what they can do with it and then they'll worry about the funding later. But you're right, at some stage They'll have to go to a finance broker to see if it can be done. Joint ventures with property investors may also be a good opportunity now because property investors are thinking, well, all I can do is build new properties. Who better to partner up with than a builder? So the opportunities do abound. Will, sorry, sorry to interrupt.

No, no, you didn't interrupt at all. You're the one providing the advice. I think what you touched on earlier is important. In that ecosystem as well. Like if it was like 100%, the budget changes were going to be in place and then a change of government wouldn't affect that in the future, you could kind of double down on like exactly what you're talking about, you know, get your positioning on your website or your socials or your marketing or your partnerships, everything going in the same direction. And you know, the type of property you build and all that kind of stuff. But if you go, if you double down on that and then it flips back again from a budgetary point of view and then investors start to want to buy old dwellings again, it starts to, you might have doubled down on the wrong space.

Keeps it exciting, doesn't it, Will?

Yeah, exactly.

Far out, the government's meant to provide stability for businesses to thrive and it's just doing the opposite. It's just nuts.

Yeah, yeah, it's all part of the game, unfortunately. But I mean, to your point, there's a silver lining there which creates opportunities and you just got to be in the right position to be able to capitalize on those opportunities at the right time.

Most definitely, and some builders, even though they love working for customers and doing order jobs, it's a great opportunity for builders also to lean into building their own property portfolio. So the superpower, if you want to call it that, for builders is property, is building properties. So quite often a builder buying an old house, knocking it over, building 2 or 3, selling 1, keeping 2, or however that looks for that builder. It's a great opportunity at this point in time with the current, and I'll say with the current tax regime in place, to do that. And it's, you'd lose nothing. In fact, the opportunity for builders to buy well, hold on, and sell well is now. So I don't know, I think it's a really bright future for builders. They don't really need much expertise outside of being able to buy and build properties, which they usually have that expertise. That's what they do. That's their bread and butter.

Yeah, yeah, that's a good piece of advice. Talk to me then, if we just take a bit of an angle, What's the funding environment looking like at the moment? If we move away from the budget and think about for clients that are looking to build or investors or builders themselves, what are you seeing at the moment from a funding perspective?

Funding situation's actually quite good, Will. So there's heaps of money around and there's heaps of money around for the construction industry. The thing that's changed in Australia is serviceability and what that means is there's buffers that have been added. To make the ability to borrow less. Now, it's not all the same. So banks, for example, have been lent on by APRA, which is their regulating body, to put a 3% buffer on lending, which means that you borrow significantly less than if you go to a non-bank lender. There's also lenders that, that have been quite active in Australia wanting to lend to the construction industry, but they're interested in the story. And what I mean by that is they're looking to partner up to some extent with builders that have experience. Their feasibility for their business makes sense. They've got a, a good forward-looking pipeline. They know how to mitigate risks. So A lot of builders do themselves a big disservice again by approaching their own bank who at that point in time may not be interested in lending to anyone in the construction industry. Whereas the bank down the road of different color is quite happy and has got many special offers, has got things, you know, no presales for example, and that Again, it comes in peaks and troughs for all the banks. I'm not saying they take it in turns, but they seem to peak and trough at different times. So knowing which bank to approach or which lender to approach to fund what you're trying to do is, it's actually critical to you securing the type of finance that you want. Running out of money is terrible thing to do. If there's one takeout for builders to take out of our chat today is the best time to borrow money is when you don't need it. When your back's against the wall, Will, and you've run out and things are tight, no one wants to be involved, no one wants to give you a chop out or a help. So if you don't need money, that's the right time to go and set yourself up for both cash flow looking for opportunities for maybe your own project or joint ventures, that's the right time to do it. So heaps of money out there, heaps of options, lots of opportunity, but it depends on how you present yourself. A lot of builders are quite— they're not brash, they're not loud, they're just people of the earth, and they just try— they're quite modest. When you're talking about finance, it's not the time to be modest. It's time to present your situation in the most favorable and accurate light.

Yeah, sorry, some great advice in there, Harry. And I think there's a real positive story there amongst all of the mess that's going on in the media and the news at the moment with the budget changes. And, you know, builders probably feeling a lot of pressure at the moment in the market in general around opportunities to build homes. There is a positive underline there, and I appreciate you sharing that today.

Nice welcome. My pleasure.

Tell me a bit more about Chocolate Money. Let's start with how you even came up with the name Chocolate Money, and then we can talk about what you do.

Well, Chocolate Money, obviously we're involved in money. The reason chocolate came into play is because most lending institutions are focused on the money. Whereas with us we're focused on the individuals. We want them to feel a certain way. We're very focused on the relationship. We want them, we want people, especially builders, when they deal with us to have a sweet taste left in their mouth, not the bitter sour taste that quite often comes with approaching a lender, bank, or broker. So all of our processes, our procedures, our people are totally focused on our clients. We want them to have a good experience. We want them to think about, you know, when you're craving chocolate, um, you have a certain feel, and when, when you eat the chocolate, it makes you feel a certain way. That's the whole purpose of our organization. We've got people in our team that have been with us for well over 20 years now, and I think what keeps them with us, even though we do talk about finance and lending and that's what we do, is the relationship that we have with our clients.

Great. Well, if people want to find out more, chocolatefinance.com.au is the website.

Perfect.

And Chocolate Money is an APB Rewards partner. So for any members that are listening today, you can jump on there and engage with Harry through the Enquire Now button on that page. And there is a cash reward as well that you can get from working together. But Harry, thanks so much for coming on the show today. I've learned a lot about the opportunities out there for builders and the changes in the budget recently. So that's one to keep an eye on soon. But hopefully for everyone listening today, they've got a little bit about, a little bit of positive news about what they can dip their toe into. So thank you.

Thanks, Will. See you.

Also, thank you to our listeners wherever you're listening from today. Like the show, subscribe, follow us, do whatever you do to support us, but we appreciate you listening today and we'll see you next time.