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Archive for the ‘Property Investment Strategy’ Category

There’s a lot happening with interest rates at present, with many severe interest rate movements.  Also I have heard financial commentators on the radio, read in newspapers and seen on TV about how interest rates are going up, interest rates are going down and interest rates are going to stay relatively stable.  This is causing confusion amongst many borrowers.

The thing is all the commentators may be right.  This is because there is no such as the one interest rate.  For example if you went to your lender to get a loan right now, if approved you would be offered the choice of a floating or fixed rate.  If you choose a fixed rate, you would be offered the chance to fix this for 6 months, 1 year, 2 years, 3 years, 4 years, 5 years and if you are with BNZ, you have the additional choice of a 7 year fixed interest rate for maximum certainty.  For my overseas readers, we sadly do not currently offer the 10, 15, 20, 25 and 30 year fixed interest loan periods that many other developed countries and in particular the USA have.  I am hoping for a 10 year fixed interest rate in the near future – but I got told by a leading banker that this is unlikely.

Current interest rates

Leading financial website Tarawera Publishing Limited lists all interest rates from their providers.  I would highly recommend all serious property investors bookmark their interest rates page:  http://www.mortgagerates.co.nz

The average floating rate across all major banks is a smidge over 6% (when acknowledging the Westpac Choices rate discount).  The fixed rates for when you lock in a certain defined interest rate for a set period of time, have a strong yield curve currently.  That is the rates of interest you pay as the length of time you fix go up sharply.  It has to be noted that this yield curve is now flattening (visually you can see this here).  Floating rates have gone up a bit, and the longer terms rate down a lot lately.

From last Thursday to today all the major banks dropped their 2- 5 year fixed interest rates.  We saw a week or so after the Official Cash Rate was put up 0.25% by the Reserve Bank that the floating rates went up by around 0.25%.  The OCR doesn’t strictly control interest rates.  It however is highly influential on short term (variable, 6 month and 1 year fixed rates).  On longer term fixed rates (3, 4  and 5 year) it is not very influential at all.

These longer term fixed rates are driven more by the returns NZ term deposit savers expect, and thanks to the Reserve Bank’s rules in June 2009, banks are not permitted to raise as much ‘hot money’ that they got from institutional foreign lenders – this was short term money typically rolling over every 90 days.

What Borrowers Should Do?

As mentioned in previous blogs on financial topics, do not have all your borrowings on one rate. Split your borrowings across a variety of interest rate periods.  Just like I advise having different banks as your property portfolio grows (to avoid the one bank trap – thanks Kieran Trass for teaching me this in 2003), it is imperative to split your borrowings at times like this.  Consider having a property schedule like I do and all my mentoring students do, where they have the loans on their properties set out including the fixed period expiry date.  Then graph this to split your borrowing and have an interest rate averaging strategy (“IRAS”) for your borrowings.   Imagine if you have total loans of $600,000.  You split them in this way:

1. $100,000 floating at 6.00%
2. $100,000 1 year fixed at 6.50% fixed interest rate period expiring 5 July 2011
3. $100,000 2 year fixed at 6.90% fixed interest rate period expiring 5 July 2012
4. $100,000 3 year fixed at 7.30% fixed interest rate period expiring 5 July 2013
5. $100,000 4 year fixed at 7.60% fixed interest rate period expiring 5 July 2014
6. $100,000 5 year fixed at 7.80% fixed interest rate period expiring 5 July 2015

In one years time your loan when the one year fixed rolls over, ie loan 2, you fix this loan for 5 years so it expires on 5 July 2016.  That way you have 6 loans all expiring at different times.  This does give you some protection in that if interest rates move up suddenly by 3% in one year (unlikely but possible), you only suffer an average rise of 0.5% in this way (as opposed to suffering all 3% rate increase if you were floating).  Conversely if interest rates fall 3% in one year, you would only get 0.5% saving, than if all your interest rates were floating.  This IRAS also makes choosing your next interest rate period quite easy!

Now of course life isn’t that simple and you can’t expect to be able to do this exactly – I don’t.  In fact like my mentoring students who I professional advise I am overweight to loans expiring around March 2014.  I broke this IRAS when the 5 year interest rates were so fundamentally cheap in March last year – I just couldn’t help myself!  The result of this is the saving of hundreds of thousands of dollars in client wealth from the number of people I was able to convince 6.5% for 5 years was a great deal.  It wasn’t a hard sell either – the catch is you have to follow financial cycles and interest rate movements.

Issues

There is a risk of a double dip recession.  Lets face it, whilst we are out of a recession the market is hardly booming.  I see Mortgagee Sales slightly rising, the number of days to sell a house rising, more fear in the market as to house price drops owing to fears investors will sell up with reduced returns thanks to the ETS, GST rises they cannot pass on (residential rental income is excluded from GST, as are interest costs, but rates, repairs & maintenance, property management fees etc are all subject to the GST increase).

With floating rates rising and scheduled to rise over the next 18 months, their may be some benefit fixing your rates.  The 4 and 5 year rates at around 7.5% – 7.85% now are looking more attractive (they simply weren’t at 8.5% or so).

The 2 and 3 year rates at 6.74% – 7.3% are other good possible options.  No-one has a crystal ball.  I think house prices will continue their slight decline to be down around 5% for the calendar year 2010.  This is on thin volumes too.  There is no doubt that we are in a property market downturn stage of the property cycle.

Talks of a recovery are too swift.  You only need to drive around Albany, down Wairau Road, around the back of Lynnmall in New Lynn, along Marua Road and to talk to commercial property investors and agents, look at the share price and annual financial reports of the listed property trusts to see that the commercial property market is struggling.  Taking depreciation off commercial property owners (including many owner occupiers) as well as residential property investors hasn’t helped things either.

Without trying to sound too special, I did say fix your borrowings last March in my blog titled Why are you floating – FIX LONG NOW!  If you didn’t consider my opinion and thought that you could outsmart the financial markets, and were proved wrong, you may have cost yourself and your families many thousands of dollars in extra interest paid to your bank.  That is ok, everyone makes mistakes including me.  However there is little point trying to fix it by floating everything now.  Spread your risk and spread your borrowing across a variety of interest rates, floating and various fixed terms.

Disclaimer:

The information contained on this website and from any communication related to this website is for information purposes only.  David Whitburn, Iodide Limited or entities owned, controlled or associated with David Whitburn (“David Whitburn entities”) do not hold themselves out to be providing any legal, financial or other advice.  David Whitburn entities do not make any recommendation or endorsement as to any product, investment, advisor or other service or product or to any material submitted by third parties or linked to this website.  Furthermore, David Whitburn entities do not offer any advice regarding the nature, potential value, viability or suitability of any particular investment, security or investment strategy for you or your needs.

The material on this website does not constitute advice and you should not rely on any material in this website to make or omit to make any decision or take or omit to take any action.

Saturday 29 May 2010

8:30am start to 6pm finish (registrations from 8am)

Parnell Jubilee Hall, 545 Parnell Road, Parnell, Auckland

The 2010 Annual Budget has just been presented and it implements the largest tax reforms New Zealand has seen in 25 years.  To arm you with the knowledge and tools to succeed in light of the Budget and in today’s market, the not-for-profit Auckland Property Investors’ Association (APIA) have a 1 day seminar BUDGET BUSTER 2010 – Strategies for Today’s Market with tickets at just $49.

The speakers include multiple best-selling Author and NZ Property Investors’ Federation Vice President Andrew King, who provides a State of the Property Investment Nation address, then sets the theme for both newer investors and more experienced investors with substantial portfolios.  APIA’s Treasurer & Chartered Accountant Ann Loudon has the all important topic of tax changes to go through, particularly in light of the depreciation changes and the taxation treatment of LAQCs to have to become aligned to Limited Liability Partnerships.  APIA’s Honorary Solicitor & Property Lawyer Tony Steindle then talks about structures, including the legal aspects of the Limited Liability Partnership, and APIA Vice President, Property Mentor & Trust Lawyer David Whitburn talks about what to buy in today’s market, how to buy it and how to analyse just what is a good deal or not.  APIA President & former NZ Mortgage Broker of the Year Sue Tierney then talks about finance in light of the turbulent global financial crisis we are in, particularly with the highly indebted European Union countries and the relevance of this to New Zealand.  ANZ Mobile Mortgage Manager Vanessa Murch then covers off financing in New Zealand, including why fixed interest rates are so high in comparison to floating loan rates and just how we get our loans approved.  In case this wasn’t enough content, we provide further value to you in relation to tenancy management with APIA Board Manager and Principal of leading boutique Property Management Firm Corinthian Limited Jan Galloway, presenting on how you should manage your property to get the best tenants and lowest vacancy rates.  This is combined with a presentation by Tenancy Practice Lawyer Scotney Williams, giving his expert advice on the Residential Tenancies Act including recent times and also proposals to reform parts of it.

So don’t delay, BOOK YOUR TICKET for Saturday 29th May at the Parnell Jubilee Hall by emailing admin@apia.org.nz now.

As a property investor, it is very important that you select the right strategy or strategies for your needs.  Most commonly the long-term buy and hold strategy creates the most wealth.  I acknowledge that often property investors diverge into property trading (buying with the intent to resell at a profit – eg. renovations and on-selling straight away), and some succeed at this when they time the market correctly and remember to pay GST and income tax on the properties that they trade.  However the vast majority I have mentored have truly excelled at the long-term buy and hold investment strategy.

With internet and social marketing coming to the fore, all too often we see property promoters drafting a large menu with so many choices, and telling us about how great our lives will be with another strategy.   Many property investors using the success from their long-term buy and hold strategy let their own greed kick in and they feed the greed of the property promoter of the day, and spend a small fortune on education on a different strategy to the one that has served them so well.  This is a distraction, and distractions cost you money.

My own mistakes and resolving them

Firstly I must admit that I’m not perfect here, having been distracted buying a Blue Peak property finding licence, but I soon realised the loss of focus in what I have truly excelled in, which is long-term residential property investment.  So I stopped and removed myself from the situations.

I would now note that the Blue Peak property finding system devised by Phil Jones, Sean Levy and Sean Wood has been proven not to work, and as is often the case with Phil Jones, he lost another good relationship he once had and litigation commenced amongst the 3 promoters.

Phil then passed Blue Peak onto Steve Goodey’s Venture Property.  Some affected licence holders (including me) who felt that they had been ripped off, stood up to the promoters about the unethical and incompetently run Blue Peak scheme.  So I learned two things from this – (1) not to lose focus and go down distraction lane, and (2) not to conduct any business with Phil Jones or his current business associates.

Distraction Lane

On networking at the breaks during Dean Letfus & Shaun Stenning’s NZ Property Guru’s [sic] Auckland seminar earlier this month, and hearing from investors that have paid to go to courses with the next best thing to do in New Zealand, I have found that people over the past 2 years have been taught about:

• Lease Options
• Rent by the Room
• NLP Training
• Presidential Inner Circle
• Tax Liens & Tax Deeds
• then insert any other random sidetrack you had like internet marketing, sports betting software, FX trading, buying apartments in Australia, buying property in Guyana etc

These are all simply distractions.  Think about the Hybrid Group’s Real Estate Board Game – there is a distraction lane that you go down, and as a seasoned player of the game since working with Kieran Trass in Hybrid in 2003, I knew going down it meant a significant retardation to the accumulation of my wealth in terms of both growing my equity, and my passive cashflow.

Seriously – what is wrong with sticking with one strategy, making a few mistakes, then fine tuning it over time and mastering it.  This has worked well with property investment for at least 5 generations in my family, and I see little reason why it can’t for the next 5 (barring being on the losing side of a World War!).

Major Distraction – US Tax Liens/Deeds?

How it works is that some states of the USA are tax deed states, others are tax lien states.  States are divided up into counties for administrative reasons and each county levies property taxes for things like roads, streetlights, schools, internal governance and administration and community services.  If you don’t or can’t pay your property taxes a lien may by statute be put on your property in favour of the county which takes priority over a lender’s mortgage.  These liens get sold (usually by auction) from time to time by counties to investors to help with revenue collection.  Whether the state is a lien or deed state is irrelevant, as what was portrayed for sale was returns of 15% to 50% (in Texas).

Commercial Alert on Tax Liens and Tax Deeds for New Zealand Property Investors

From talking with dissatisfied purchasers in my network and reading PropertyTalk.com forum posts, and taking the time to understand the offering, I personally take issue with promoters who don’t tell the full story about significant aspects of their product:

1. There was no mention of US accountancy fees, nor state and federal tax compliance – which all will cost the Kiwi investor money;
2. There was no mention of the NZ tax consequences (including the accrual regime) on the US tax liens;
3. There was no mention of US initial structure (company/trust formation) costs – although this may have been in the US$5,995 pack and with a bit of ‘googling’ I could see LLC formation for as little as US$199;
4. There was no mention of the minimum US$1,000 balance in the US bank account that apparently has to be opened by Kiwi Tax Lien/Deed investors;
5. There was no mention of exchange rate risks (although I note that at $1NZD : US$0.69 this is less of a concern than it once was);
6. Legal costs to foreclose on a lien (a friend working as a lawyer in the US noted that it often costs over US$6,000 in legal fees to foreclose a lien owner, and it is not unheard of to be over US$20,000);
7. Risks of buying a lemon property – you could purchase a piece of swampland, a landlocked property, a road, a tiny section with a tree on it, a footpath etc if you don’t do your due diligence properly;
8. There is mention of being able to buy tax liens for as cheap as US$1 on a webinar, yet there is not a single deal done for remotely close to that price for a tax lien course subscriber of nearly 1 year;
9. Risks of not buying anything at all and blowing US$5,995 – investors at Property Gurus that had purchased the Tax Liens course run by Steve Goodey in NZ, and by Phil Jones & Dan Ekelman (DANE Wealth Academy) in the USA have said that they have been trying to buy tax liens & deeds for months on eBay and following the techniques taught by the Millionaire Mastery/DANE training.  8 months later of genuine trying and they told me still no tax liens.  Other investors trying every couple of days for 3 months have not been able to secure any deals either;
10. If it were so good why can’t more of the 305 million Americans purchase tax liens, rather than getting 4.3 million New Zealanders to purchase them;
11. Why would an investor want to become a debt collector for US counties – many counties collect the easy debts themselves, and pass the hard ones onto investors;
12. If you were a lender owed US$250,000, would you rather pay out a US$1,200 tax lien to protect your security in the event legal foreclosure notice is served by the lien holder?;
13. Dean Letfus published on 9 March 2009, on the public PropertyTalk Forums that they are “they are snake oil, complete with white shoes and wagons” (source: published already on the internet at http://www.propertytalk.com/forum/showpost.php?p=168276&postcount=5).  Dean Letfus then expanded on this to say how dodgy they really are (source: Published on the internet already at http://www.propertytalk.com/forum/showpost.php?p=168389&postcount=8);
14. There is a 100% satisfaction guarantee on www.cashflowliens.com that appears not be honoured – in fact I am informed that the promoters try to shirk it.
    

    We guarantee to teach exactly how to earn between 16% and 25% returns on your money and give you the exact step by step processes for buying real estate up to 90% BELOW MARKET Value in the USA AND we will show you precisely how you can do this from the comfort of your home where ever you live in the World without ever having to leave your own Country!

So for me, tax liens and tax deeds are a no go zone.  They may work if you are in the US and can commit time and knowledge to becoming a tax lien/deed expert.  It is my honest opinion that they will make the majority of NZ investors poorer than if they hadn’t invested in them at all.  So my advice is to read this great article in the widely circulated Sunday Star Times on tax liens and tax deeds: http://www.stuff.co.nz/business/personal-finance/1762855/Beware-of-lien-returns.  Stop their promoters from getting rich at your expense and don’t invest in them.

That’s all from me – stay focused and don’t go down distraction lane.  Stick to your knitting and enjoy the rest of your week.

Kind regards

David Whitburn LL.B BSc

So why are the long term fixed borrowing rates so much higher than shorter term rates at present?

5 reasons why there is such a difference now:

1. OCR doesn’t correlate well with long-term interest rates

2. Risk premium for OCR rises

3. Deposit rates:

we will not be developing any proposals for a land tax, a comprehensive capital gains tax, or a risk-free return method (RFRM) for taxing residential investment properties,”

The government does believe there is a gap in the current tax system around property investments where income is being derived but, in aggregate, no tax is being paid – in fact the government is actually losing revenue in this sector,”

We will therefore be making changes to the way property is taxed, which will result in increased Government revenue and more fairness for the taxpayers. These changes will be announced in the budget.”

We have to wait and see what happens in May next.  However now is clearly not the time for making rash decisions like selling your long term buy & hold properties.

I want to add a little bit more to my previous blog on whether to go for capital growth or equity as your property investment strategy?   Before I go on I will say that this is my opinion and the right strategy for you will depend on a number of things.  Particularly early in your wealthdevelopment you are going to need good cashflow - if you don’t have this from your job or Business then you will need this from your properties.

Timewarp to 2002 – triggers to me starting investing

I had read Andrew King and Lisa Didson’s best-selling book The Complete Guide to Residential property Investment in New Zealand, and Dolf de Roos and Jan Somers’ book Building Wealth Through Investment Property. I went as a guest of a friend’s parent to a couple of APIA, listened to property investment accounting guru Mark Withers talk on tax savings from property investment, and since I was a young corporate solicitor in what was then the top law firm in New Zealand I was on the top tax rate.  Some family and family friends were investing in property, I had helped my grandmother for years drive to collect rents from tenants and be her assistant property manager, so I knew it was time to invest myself.  Having been to fund manager, sharebroker and property investment seminars the presenters were saying that only between 1 and 8% of people retire rich, most are dead or dead broke (and obviously statistics get a little bit distorted or mis-interpreted a fair bit to sell a story sometimes).

So I had enough positive affirmation to make the decision to buy property.  I am delighted with all of the above that helped inspire to get me into property.

So I started looking in the property presses of Auckland, various papers, using websites and agents.

My $200,000 mistake (my case study)

Back in 2002 when I started my own direct property investing, I made a mistake.  At the time I didn’t think so, but hindsight is a wonderful thing.

I had narrowed my selection down to two properties - one in the lower decile suburb of Manurewa and one in the exclusive subrub of Remuera:

1) a 3 bedroom house on just over 800sqm in Manurewa, to be auctioned with agent’s estimated price and vendor’s RV of ~$152K, rental appraisal $260/wk, owner occupied, that would benefit from a minor cosmetic renovation; or

2) a 2 bedroom unit in Remuera with less than 300sqm land, list price $250K sale by negotiation, rental appraisal $275/wk; owner occupied by an elderly couple in need a cosmetic renovation.

Options:

Manurewa house: After talking with the respective agents and attending the Manurewa house auction where I was the only non agent there, I made a bid at the auciton at the nice low price of $125K.   This did not meet the vendor’s reserve so the auction was canned.  The vendor’s reserve and requirement was in fact $140K as he needed to clear his Mortgage of $133K and play to relocate to Australia $6K and of course $1K legal fees.  So $140K I was told would definately buy it.  The property would cost $7K to renovate with professional assistance or $2.5K if I did it myself and with friends.  The rental then would be $280/wk giving a 10% yield.

Remuera unit: I was told the vendor wasn’t very negotiable at all, the agent not revealing the vendors reasons to sell, apart from time to move on to a new place.  They said $250K would buy it.  The property would take $10K to renovate professionally or taking out the bits I could do $6K.  The rental then would be $300 per week giving a 6% yield.

Which property would you choose?

Well I choose property 1 the Manurewa property - being very attracted to the yield.  Cashflow is King right!   I got myself a pre-tax positive property and thought I was very clever.

After my renovation the property was valued at a Massive $160K up from the $150K if I hadn’t touched it.  In mid 2005 I still owned it and it was valued at just $175K.

Guess what the Remuera property was worth…

It sold two months after that registered date at $470,000.  All it needed was paint, carpets and a new benchtop, so even if the asking (list) price was paid, $10K for renovating this small-medium sized unit, it still went up over $200,000.  Allowing for the tax rebate this property was after-tax Cashflow positive.

Tired of my assigned property managers sadly hating their job managing South Auckland properties I had 7 property managers in this time, and rent arrears so I terminated their contract.  I managed the property myself for a while and got bored of turning up to collect rent arrears and finding their 5 children aged from 2-9 years of age unattended.  I asked the 9 year old where’s Mum, where’s Dad – I got told at the pub!  Sadly after won of these big day’s out Jake the Muss put his fist through the mother face fracturing her skull.  This didn’t help my rent arrears and I saw blood on the walls of my rapidly deteriorating home.

I rang Tenancy Services wanting to get an immediate eviction – but to no avail.  They were not 3 weeks behind in rent!  I had had enough and was pretty disappointed with project and managing it myself was rather stressful – so I changed my mind as I wanted to keep this property forever, and I sold it.

Look at my foregone equity – taking into account the nearly $150/wk after tax positive cashflow I made (interest rates were sub 7%), reno costs, but subtracting the lost rent and damage to the property that they couldn’t pay (they split up) I made less than $20K on this property.  The Remuera property would have made more than $200K after allowing for the costs of reno and cashflow

So I cost myself $200,000 by going for the positive cashflow property.

Equity is King.

I now know what my Granny and parents know – that cashflow is nice, and is needed when you are starting out building a portfolio.  But whenever you get a choice – choose equity.

Remember that when you have an equity portfolio you can choose to change to a cashflow portfolio (or even putting the money in the bank!), but try changing from a cashflow to equity portfolio straght away.  You will not be able to do it as you will not have much equity and hit debt sevice walls with the bank straight away.

Conclusion

I conclude that not everything you are taught is right.  Just because other investors do it does not make it right.  Cashflow is very important and you must be able to meet your debt obligations.  However once that is achieved then Equity is King.

Some readers may not like my message as I am directly seeking that they question their own cashflow strategy – however I want to say there are other strategies out there and I guess if I can help a couple of people reading this blog not blow many hundreds of thousands of dollars in lost equity as I did, my job is done.