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.

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?

• 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.

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.

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).