Archive for the ‘Property Development’ Category
Yes it is about time that I build a bridge. Not in a personal or relationship sense, but in a construction sense. We have a property that to date no-one has dared to develop because it has been “too hard”.
That phrase I hear all too often about how hard it is to drive around Auckland, buy a home, buy an investment, build a house, save money, give up smoking, {insert next random thing}.
Well as you all know great rewards are gained by those that persevere, don’t give up and say it is just too hard. So I am putting in the hard yards on a project that I have under due diligence in West Auckland. It is a 3 lot residential freehold subdivision and their is a creek running through it. This creek has freaked out a number of investors and now the property has been getting stale on the market for 3 months as those that saw it thought it was too hard.
All it needs is a bridge over it to unlock the equity of two dormant sections – sleeping financial giants. So I have learned today a lot about bridges and how cheap section + cheap section = big money.
Note that this is not the creek or bridge I am building. In the absence of my digital camera yesterday this is a nice place filler
Whether or not the agents have in this case done the best job they could have for their vendor client is another issue and not my primary concern, however we are the best offer that they have in front of them on paper at the moment. The thing is we are basically getting the land for the two sections for free, with our only special cost being to build a bridge over a less than one metre wide and 50cm deep creek with around a 8 metre span to avoid a 1 in 100 year flood plain.
The site is glorious in its simplicity. It has only been made “too hard” by people lacking vision and a solution. Remember that Section + Solution = profit and go out with a new string to your bow – be armed and dangerous.
Enjoy your weekends.
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?
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).