Archive for the ‘Property Development’ Category
It’s been a great last couple of days. Had a great dinner and leaving party for a friend I have known all my life (since our parents are great friends). The All Blacks won convincingly vs France 61-10 (although superstar Ali Williams’ jaw may not agree quite so much). And Rafael Nadal one of the greatest ever tennis players on clay beat world #1 Roger Federer in the French Open Final ==> what a game.
We are closing in on a mega trade deal at the moment. You will know my belief that in todays market to thrive that you need to create the deal. So we are seeking to solve another person’s problems.
DIY Superstar wannabes
The problem the vendors have is that they wanted to improve their home, but didn’t want to follow the rules, or know the rules. You need a building consent under the Building Act 2004 whenever you do structural work to a house.
They have put in some extra windows, stairs, ranchslider and a kids playhouse high up off the ground with no handrails. Sadly for them their jealous neighbour dobbed them into the council and the council investigated and found the work required a permit and they have therefore done illegal building work. They then got a letter from the council giving them 6 weeks to remedy this (ie restore it to what it was permitted to be). They did not oblige and even told the inspectors that they have improved it so much any council would be foolish to prosecute, or they will call Fair Go. Well they did this and Fair Go was not interested funnily enough. Unfortunately for them they have been issued a notice to fix giving them 4 week to remedy this or else – be forced to (by a court order). Don’t comply, then the house may be shutdown.
So since they spent their money on an illegal thing (unpermitted reno) they have run out of money to restore it. So these DIY wannabes have failed and because they did not know the rules they are sacrificing many tens of thousands of equity to us (the highest offerers on their property). It needs to be sold before it becomes a big problem, we will simply spend the $7-8k to get it fixed, then build a minor dwelling there too.
So the house goes to auction. We like auctions for non-standard properties as the fact it is different scares most people. There is far less competition and seldom a decent bid. Also on Saturday you will recall in Auckland that we had some tremendous downpours in the afternoon, and the cold southerly didn’t help bring the punters along to the open home.
So we were the only bidders and true to form were below the vendors. So our agents are in the final stages of crunching a mega deal at the moment.
Most prospective buyers don’t like things with a twist. It is “too hard”, “too cold”, “too wet”, or “too scary” or insert any other excuse why not to buy a property to make you $100K in 9 months.
The morals of the story are:
1) Don’t brag too much to your neighbours
2) Knowledge is power – if doing structural or any building work, speak to a qualified builder or architect
3) Go to auctions when it is a miserable day or the property is not a standard one
There are some great deals out there if you persist and know what you are looking for.
Post-Script:
Auckland based property developer/investor/trader/mentor Sean Wood got fined $30,000 in June 2008 for unconsented building works. Sean Wood’s company City Link Properties was granted a building consent based on plans to extend an existing house. The company submitted a plan to build an upstairs bedroom with ensuite and a four car garage. Instead five rooms were built upstairs and part of the garage was turned into a living area – leaving room for only two cars. Manukau City Council Compliance and Enforcement Manager Kevin Jackson says he is pleased with the sentencing as the building work was over and above what was originally submitted:
People can’t put in one set of plans to the council then do something completely different and hope to get away with it. I am disappointed that this was an experienced property developer who knew the rules but chose to break them.”
Source: Manukau City Council website and New Zealand Herald
Sean Wood’s court fine and subsequent adverse media publicity will not doubt get more attention from Peter Aranyi that has a desire to criticise other property education providers repeatedly, in an flawed attempt to set his company apart. Therefore it appears a bit strange that Sean didn’t strive to comply as he had a lot of time and a number chances to rectify this well before it went to court.
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).