Archive for May, 2007
Today has been an Interesting day. Seen a house burning down. Had a fantastic feast of a lunch whilst sharing ideas with property investor & developer and former mortgage broker Ammon Acarapi, and Lease Options guru and and property investment superstar Steve McMenemy.
Steve’s been busy buying property – making himself a few more hundred dollars a week positive cashflow from Lease Options, doing some super do ups and quick flicks, and basically anything he can to maximise his lifestyle and quality time with his lovely life wife Kelly and their two kids. Steve’s an inspiration to me as well as a long time friend of mine. It is just so fantastic to see his and Kelly’s continued personal and portfolio growth. Keep it up mate.
He is a fine example to many younger New Zealanders that you don’t have to join what seems like the majority and do an OE. When we live in the most beautiful country in the world, have plenty of financial opportunties to make for ourselves, own Businesses to grow – there is not such a need.
The burning house of Kemp Road & insurance protection
In the same street as our Fuzo showoffice today I saw and smelt a house burning down. Not very pleasant at all. The firefighters were super and got there very quickly – sadly the house inside was gutted. The second house within the past 9 days on the street to be gutted by fire. Suspected electrical fault again at this early stage – guys old wiring is dodgy. No one was injured or hurt fortunately. However this got me thinking. For properties you are keeping you can lose a substantial asset if a current insurance policy is not in place and income from not having a rental house in place. My suggestion is to get insurance policy extensions to cover loss of rental income from fires too. It happens far too often.
A Fuzo client has even had their house burn down (the older one not the new house we built for them). Fortunately they had insurance to cover the rental income whilst the assessors did their work, demolished the old home, got building consent to erect a new building, insurance company approval to built it and then getting it built. This takes many months, possibly a year – can you survive without that cashflow? If not get insurance to cover it. I know some successful investors don’t insure all their properties, but until you achieve massive success and have 40 plus properties in your conservatively geared portfolio – you are not ready to do the same.
Asset protection
I often get asked about what structures I use. Today I helped guide a couple of trading and development clients re just what is the best structure for their property investment activities today. So for those that I have promised this information to and to be useful to others here’s what I do and recommend.
Because I am a Business owner, property developer, trader, investor and own home owner trusts are the best structure to have. I value asset protection extremely highly, more highly than total tax optimisation so I have 3 core trusts:
1) A trading trust – for all properties I buy with an intention for resale
2) A buy/hold trust – for all properties I hold and buy for the long term (with no plans to resell at the time I buy it)
3) A family trust – for my own home in central Auckland, my wife and my life insurance policies, some ungeared passive investment (shares, managed funds, bonds, mutual funds and term deposits).
I have 3 other trusts, but these are for my business interests, joint venture entities, and I am a trustee of some of my family members and a couple of close friends trusts too.
I highly recommend the use of professional trustees in your trusts (not so for trading trusts). So I am not a trustee of my buy/hold trust, nor my family trust. Rather leave my lawyers to run it and let me focus on my core activities.
A structure like this gives me true asset protection in the sense that I get creditor protection, a clear and simple ownership structure, smart savings structure, in built succession plan, flexible structure, tax effective for me, no need to enter into gifting programmes, option to get around means testing (eg for medical, pharmaceutical and nursing costs).
In my opinion everyone should own their own home in a family trust. And also every property trader (that I define similarly to the Income Tax Act 2004 – as a person that purchases a property with a purpose of resale at the time of acquisition) should buy that property in a trading trust. However for some salaried people it may be better to purchase long term buy/holds in a Loss Attributing Qualifying Company where they get massive tax advantages for doing so. In my opinion business owners should be using the tri-trust structure I have recommended.
I’ve been thinking. And I have been talking. I have been thinking about where the market is at right now and the strategies property investors need to adopt to continue to thrive. My very supportive and helpful network fortunately includes Harcourts top Auckland agent who really has his finger on the pulse as regards current market trends, and a leading Ray White agent who is quite simply one of the finest negotiators I have ever seen (whether working as a solicitor or property developer crunching deals). This morning and lunch they gave me their take on the wider Auckland market which I will share with you.
There are currently more buyers than sellers still, so simple economic principles supply.
If supply > demand = house prices rise
The number of days it is taking to sell their many listings is increasing in general though. Part of the reason is that there still seems to be a bit of a gap with many vendor’s holding out for top dollar, or been ’sold to’ by an agent trying to buy their exclusive listing. The other part though is buyer confidence is a little bit down recently. The Interest rates and negative media attention is bringing a lot of fear into the market. This fear is translating into longer due diligence timeframes being required, less people buying unconditionally at present and buyers being more picky. An Interesting trend being observed is the number of people ‘downsizing’ their homes and of course home loans at the moment. I think that a few more people are doing this lately because they have been fixing for 6.{something} % for the past 3-4 years. That rate has now changed and gone up 2-3 more percent, so reducing their debt they consider to be a prudent course of action. As a result they are selling their homes and buying something often more than $100K cheaper, with a corresponding lower home loan.
In terms of the market, Camerson Bagrie, ANZ Chief Economist stated in his address to the Auckland property Investors’ association(www.apia.org.nz) on 10 May 2007 that he expects there to be no further Interest rises to perhaps at worst a further 0.5% Interest rate rises over the next two years. So he thinks like Tony Alexander, BNZ bank Chief Economist and my little sister Sarah Whitburn (Auckland University’s top undergraduate Economist 2001 and leading solicitor at Bell Gully – ranked NZ’s number one law firm) that this high Interest rate environment will be around for a couple of years. Sure it is crystal ball gazing for all of us – but I feel that the market will have this high Interest rate environment until 2009 too, before the new National Government which will win next year, is able to turn things around and have an export led recovery with lower Interest rate environment. These lower Interest rates will assist the high NZ dollar to come down, as yield hungry Global investors (also see good articles in Investigate and Unlimited magazines over the past year on this) will not choose NZ as the place to park theur savings into as the yield will come right down.
There is also an increasingly larger amount of traders in the market hunting down equity. With other drivers of migration (including the northward drift into Auckland, the nation’s economic hub) all factors are conspiring to very slow growth, with the real rate of growth (ie inflation taken out) being 0-3% over the next couple of years.
This of course will mean we cannot rely on the market to take us places as we could in immediately previous years. But it will also mean there are great opportunities out there. Opportunities as people don’t have time to wait the usual numbers of days to sell. People being squeezed by banks with higher Interest rates needing to find a quick solution (your purchase).
So don’t give up – just think carefully about what you are doing, and review your strategies. There is a lot of negativity in the market today, and it is all to easy to find an excuse to not do something and why you too, can do nothing. Then you can just be another slightly over broke ordinary person dependant on the government of teh day for the long returement years you are likely to face. This is the beauty of life – you call the shots and have your own destiny in your hands. “Save and prosper” Eileen Whitburn (1993) b. 1908 – d. 2002
It has been an Interesting past few days. I have had a good time to reflect and learn more about myself and my priorities.
What if?
I have seen a few people with so much negativity in them, whether from poor health, loneliness, being eaten by jealously or whatever, just lose the plot. I was wondering whether if ill health or misfortune were to strike me down (eg a sudden heart attack) how would I like to be remembered?
Makes you think doesn’t it. Life is short. You only live once. So why do so many people live life in fear of themselves and other people, hide from reality, and inflict so much pain on themselves without even knowing it. Your health is very important – without good health you are either dead, dead tired, in pain or likely to head that way soon. I am not just talking about physical health but mental health too.
My wife’s sister died from poor mental health at her own hands, I have known others with mental illness that have felt so miserable they have attempted the same, and seen friends and family die from physical illnesses and had a friend die instantly in a car crash from a lack of focus and crossing the line of the road, killing his girlfriend and the the oncoming car’s driver.
My stories
I have learned that life is too short to play games. I admit I have played some – but on reflection it is just too damn tiring. It is time to figure out what your true values are, and to live those beliefs. Where are your priorities? What is the point of having money if all you do is work 90 hours a week then get a crippling cancer and die early? My Grandmother who is currently 89 years old has lived for 16 years longer than my grandfather did and is still going strong. One of her biggest joys is me not going into medicine like her husband and son (an uncle). Why? Surely being a Doctor is fantastic and right up there with being a lawyer or elite Businessman.
The answer is that he worked such long hours whether studying to be a doctor, practicing to be a specialist (Obstetrics and Gynaecology), being on call 24/7 until he was 52, as babies just don’t come out from 9 – 5 like they should! Then when he was a superintendent of a hospital the paperwork was so much that he worked 80 hours a week in the office instead “with the gloves”. He then worked as a consultant for the Minstry of Health to the day he died in his 70s on health standards for immigrants (as even the most deranged left wingers would agree that it is just plan stupid to allow someone to immigrate to NZ when us taxpayers have to pay $50,000 per year to keep them alive – get this some immigrants we allow in cost us many hundreds of thousands a year more than that, but I don’t want to stray off topic). So maybe he had work as his number one priority. I know granny did not appreciate this – and she misses him dearly. She is glad that I am not in a strict 8:30 – 5pm job (or worse) and not going down the same path as my grandfather.
I never met my other grandfather. He was a builder turned propertydeveloper. He died of cancer before I was born. His wife and my grandmother lived into her 90s, nearly 30 years after he died. It is not such good news statistically for us guys so we need to be even more vigiliant about our health. Do you really want to leave your loved ones by themselves for many of the best years of your life when not only do you not have to work, but can relax, travel and do what you like if you are in good financial, physical and mental health.
Get in good financial, physical and mental health
Find the balance guys. Surely the important things are to be in the best mental, physical and financial health you can be. When you have these three things all healthy you are a devastating force, and can truly be “in the zone”.
Don’t get me wrong having money is fantastic and I am very passionate about building my wealth and wealth of other people. But it is not my main priority in life. It gives me a home, passive income streams, good equity reserves to leverage into to create cashflow from. BUT without good mental and physical health it would not mean as much to me.
My message is also think about where you are heading. Do you like where you are going? If you don’t surely now is the time for change. How can I get in better physical and mental health. I think you should all know by now to speak with Richmastery or me if you want to get in better financial shape.
Postnote:
If anyone reading this knows someone that may be feeling depressed there is help out there. One of the greatest ever All Blacks, Auckland rugby try scorers and my former butcher John Kirwan is fronting a very successful campaign aimed at helping curb New Zealand’s atrociously high suicide rate and encourage those with mental illness to acknowledge that it is ok to feel the way they do and there is help. I have lost a loved one to suicide and it really hurts. I with I could resurrect her, known what I could have done about it. For some it may not be too late. I highly recommend taking a look at http://www.outoftheblue.org.nz/index.php. Whilst you may be like me and lucky enough not to have any mental health issues – maybe someone you know is not so fortunate. What can you do as a friend to assist them?
It has been a great weekend. More typically perfect Auckland weather. Some fantastic exercise yesterday with my East Coast Bays Soccer Team (even though we lost). Time to look at an excellent property investment strategy for those who don’t like solely running marathons (ie. very long-term buy & hold property investment).
What is the Wealth Wheel?
I am wanting to shed light on the Wealth Wheel as I have been emailed about it and posted in previous blogs about it. Basically in today’s market to continue investing you need to adapt to having the correct investment strategies for the market. We have already discussed that you owe it to your to keep investing as if you don’t you will fall into old traps of making excuses as to why not invest in property or even worse at all. Most people do nothing as that is easy, but in return they get nothing.
So buying and adding value to property is key. Selling this value realises equity that I know you all want to have. Basically you trade equity for cashflow. The Wealth Wheel does this through property trading and/or development where we create equity by smart development and construction. We take a property with land on it and create value. The Wealth Wheel is where you buy/build and sell a certain number of properties and from the profits reinvest these into a property that you buy and hold. So you mix sprinting (trading) with marathon running (buy & hold very long-term investment).
Particularly with interest rates rising it is no secret that it is harder to get bank loans at the moment. So the traditional buy/hold strategy is not working for many people. As a result by trading 3 or so properties and putting the profits from the trades into a buy/hold, you are investing and building your portfolio in a sustainable way. This way you get a conservatively geared property with positive cashflow per tax as you have reduced the debt (loans) on it significantly.
Example
One quiet achieving client has been busy in the past 18 months. A husband and wife team, they have purchased and developed 4 properties with us in this time. All 4 properties have had minor dwellings built on them in the Auckland region by Fuzo. Whilst I need to learn how to post graphics eg Excel spreadsheet please bare with me as I try to type it without losing you in the numbers (and bad formatting). The strategy is great even if the formatting doesn’t come out right!!
Deal 1 – MD traded
Purchase price $275,500
Project expensives on MD $149,212
Sale Price (less commissions) $485,000
Net profit $60,288
Tax to pay (as per client supplied figures) ($17,584)
After tax profit $42,704
Deal 2 – MD traded
Purchase price $332,000
Project expensives on MD $158,375
Sale Price (less commissions) $555,000
Net profit $64,625
Tax to pay (as per client supplied figures) ($18,660)
After tax profit $45,965
Deal 3 – traded
Purchase price $317,500
Project expenses on MD (close est.) $152,000
Sale Price (less commissions) $510,000
Net profit $40,500
Tax to pay (as per client supplied estimate) ($11,694)
After tax profit $28,806
Deal 4 – MD Keep as buy/hold long term investment
Purchase price $345,000
Project expensives on MD $150,000
Registered Valuation $540,000
Net profit on this deal only $45,000
The three trades netted $117,475 in after tax profits. Not bad when both were still working! This shows the value of time and expertise leverage. The profits were then all put into reducing the loan on the buy/hold property(deal 4).
This had the desired effect of reducing the Interest costs and making the investment pre tax cashflow positive was Massive equity in it:
The resulting buy/hold property
Equity: $261,475
Cashflow: $10,777 per annum (pre tax positive cashflow using 9.0% interest rate)
Ie. just over $200 cashflow per week per tax positive cashflow – WOW!
Who wants to get pre tax positive cashflow now? My hands are both up! Surely we all do though. Positive cashflow is what we eventually retire on. If you think KiwiSaver is going to save you – think back to what previous governments have done to these compulsory savings regimes. You need to look after yourself and not merely be yet another person struggling to enjoy their hopefully lengthy retirement years.
The Wealth Wheel has generated Massive equity and cashflow for our investors. A property with a done up house on it, and a brand new minor dwelling. Low maintenance, great depreciation expense with the too getting loading on the new building (minor dwelling) and as with all minor dwelling projects the land is already owned so you can depreciate everything.
Conclusion
It really isn’t that hard. I think sometimes people make investing out to be a lot harder than it really is. Outsource everything you are not entirely comfortable with to experts. Tap into the knowledge of specialists and look for ways you can keep progressing. Stop looking at reasons why not to invest – change your methods and open your mind. This is the time to trade to invest.
As Robin Williams playing John Keating in the 1989 hit movie Dead Poets Society said “carpe diem, sieze the day.” Perhaps we too need to be ripping up the textbooks of buy/hold property investing as the boys in Keating class did to Dr. J. Evans Pritchard, Ph. D book on Understanding Poetry. We live in an ever changing world where the only constant is change. My question to you is – when will you make the changes you need to financially thrive?
It is no secret that a number of factors are making the property investment environment different to a couple of years ago, particularly:
- higher purchase prices
- higher interest rates
- higher council fees, contributions, rates and levies
- higher building compliance costs
However does that mean we do nothing? Or do we take notice of the situation and adapt to the market and change our approach to one that will succeed today.
In the immortal words of Billy Ocean: “When the going gets tough, the tough get going”.
It’s time to evolve
If you do nothing, since basic laws of nature apply, the result is that you get what you put in, ie. nothing out.
Therefore we need to realise that the buy/hold strategies of yesterday by themselves are not going to get us ahead in this market with challenging times ahead, and little pressure for rental growth over the next few years. We want to keep investing, as it is great to have assets working when we aren’t, however to compliment this buy-hold long-term strategy we need to trade properties and focus on equity to acheive our goals.
Equity is king
Whilst the importance of cashflow cannot be underestimated, as it pays for your R+M and the Interest expense to let you keep your property, equity is king. Equity allows you to pay down bad debts like hire purchase payments, personal loans, those naughty credit card purchases etc. By having equity in deals you can choose to trade them, and pay down profits into existing buy/holds to give you cashflow, or revalue and buy another.
Speaking to other successful investors that operate all around the country positive cashflow is all but gone on. Therefore it is time for us now to create the deal. Whether we get it from the market, by buying below value, renovating to add value, or developing to create equity – there are an abundance of properties that you can make many tens of thousands of dollars out of every day.
Perhaps you need to consider the Wealth Wheel where you buy/build/sell 3 properties and from the profits purchase a property with very low loan on it. The low loan means less interest expense for you and a positive cashflow property with bug equity in it. I have clients are doing very well with this strategy, but I emphasize that this is just one strategy available.
The last couple of weeks have been a real adrenalin rush. Fuzo’s finders have bought and sold a couple of fantastic minor dwellingable (new word we created) properties, we are doing many due diligence reviews on propertiesfor Fuzo clients to subdivide, and of course lots of great work for the Auckland Property Investors Association (“APIA”). I am a passionate member and on the Board of APIA, currently holding the position of Secretary. APIA provides a massive lobbying force, group to network with, access to local area and special property interest groups, the NZ Property Investor Magazine, discounts and of course monthly meetings with great topics and speakers. I think every property investor in Auckland would receive fantastic benefits from joining APIA. I have been working with Garth Melville (our Treasurer) on APIA’s submission of the Reform of the Associated Persons Rules (ie the tainting rules). Combining President Andrew King’s input with property investor statistics we compiled a fantastic submission. Other bloggers here have talked about this issue, so I will not thrash it – instead I will update you with what changes are made if any as soon as I know about it.
Initial reactions to new housing rules
We are seeing a number of Interesting things lately – eg. proposals to have double glazing of windows of all homes, stricter rules on insulation and a myriad of smaller things all designed to maximise heat prevention (which is great) but sadly this will raise the cost of new houses. And when people and the media complain of higher house prices, this will just take house prices that much further. In certain areas of New Zealand (eg parts of Southland) to build the cheapest possible permitted home you will have the situation of the house costing well over $1,000 per square metre to build, when the neighbouring older houses could be worth $500 per square metre. Building new houses will be that much tougher for many home owners, and indeed investors alike.
My advice – call an architect or development specialist before embarking on ANY structural building project, then get estimates of costs from them and reliable builders to know what your project costs is going to be. Too many people are thinking that their building will be just like the last one they did 4 years ago.
Newsflash: the rules have changed. The Building Act 2004 has come in, the Building Code is far far stricter and more expensive to comply with. Materials and labour costs have risen too, council fees are Massively up in some cases quadruple what they were 4 years ago! In addition some council now have new revenue streams (eg. development contributions) that they justify under the Local Government Act. So acknowledging that it is development and some variations are going to occur – make sure that you have a pretty firm idea on the numbers, to ensure that you can finance the project, then don’t delay, just do it.
As to what strategies I believe that you need to adopt for success today – this will come in tomorrow’s blog.
I love property, and really enjoy being able to go along to properties with an eye on how much value can be created, or otherwise simply walking away after a quick chat to the agent or vendor.
Through being at the cutting edge of the property market day in day out, I have found that in today’s market to succeed, you need to be doing something a little bit different to most. You need to add value to the property you purchase – ie. create the deal. In developing where I make my profit can be in a number of steps:
1) profit at purchase (but below value)
2) profit on renovation (do-up)
3) profit on development (obtaining consents, planning)
4) profit on construction (building the plan)
The profit is realised at the sale (if you are trading) or on getting a new registered valuation (if you are keeping it). Sometimes I am happy to buy at retail as I can make enough money from the other aspects. It is always about the overall project, and your buying rules. Getting 3 of the 4 prongs has worked well for me.
Property yields are dropping all around the country a the moment. Talking with the Auckland Property Investors Association President, Andrew King last month, the average Auckland gross yield has dropped below 5%. As a result to keep actively investing you need to create the deal.
We are working with many investors at the moment who are increasingly seeing development as the way forward. Whether you are trading properties or doing a development to create equity and/or cashflow – look at the wonderful opportunities you have with land.
Basically to see my favoured strategy I recommend going to www.fuzo.co.nz, and take a look at the House Trap documentary (TV3) that I filmed last year on minor dwellings with Kevin Biggar (Trans-Atlantic Rowing race winner and he walked to the South Pole of Antartica by foot too).