Posts Tagged ‘property investment’
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.
From my network I can see that the market is at an Interesting stage. Whilst the boom is over, does that mean we panic and bag others that continue to invest though?
No it means, we look at our current portfolios. I liken a property investment portfolio to your car with cashflow being the wheels, the chassis being your assets and you are the engine. Whether you are a little lawnmower engine, or a 10L V12 engine (see below) comes down to you, in terms of your skills and Education. Wheels are pretty important to keeping your car moving. Similarly cashflow is absolutely vital as if you don’t pay your lender their loans they will take your property, and your car will not keep moving. cashflow is not the exciting part of investing – but I can assure you of its importance.
You can wash and clean your car’s body, but the main thing to do is to look at your engine to heighten the speed and ensure endurance of your portfolio and car.
Fine tuning your engine
Maybe you just need to fine tune your portfolio. Every day I get told stories about how people can’t make money in property, and why people are selling. Even some media so called experts are telling us about how hard it is in the property market at the moment. Yes, it is hard to make good money, but if it was easy everybody would be doing it. I Mentor a few investors, and what I am recommending is in some cases fine tuning your engine and in other cases – a complete engine overhaul.
The main reason I need to overhaul my students engines if because they have been got to by their friends and families – the “doubting Thomas’s”. Hey there is good reason to doubt and you should always ask questions, however if you want to be one of those that really gets ahead and continues their great growth you need to analyse you portfolio, have some goals and commit to them 150%.
I know some people are finding the market tough at the moment. One of my clients has $1.5 million of borrowings coming off long term fixed rates below 7% over the next 3 months, which means many tens of thousands a year more in Interest costs. So instead of joining the masses panicking and selling property consider all your options. Sure selling your property is a valid option, but there are other options out there. I am advising clients to:
- look at your borrowings (possibly with the help of your Mortgage broker) - can you restructure your borrowings to ease your cashflow: change to Interest only loans, have the loan term extended, or possibly get a cashflow Mortgage (although a binding ruling from Inland Revenue as to the tax deductibility of the capitalised Interest has me in two minds about this product at the moment…);
- look at ways of adding value and rental to your rental property: maybe your have lots of land to subdivide, build a new house, minor dwelling on, add an extra bedroom, deck, cosmetic renovation, fix that dilapidated fence, splash out $60 on a new letterbox with decent numbers on it;
- look at ways of getting extra cashflow outside property (for some people it may be getting a second job, getting involved in a network marketing Business,getting a payrise/bonus from your job or extra funds from your Business;
- look at ways of getting extra cashflow from property - eg. propertytrading or Lease Options (my good friend and super investor and developer Steve McMenemy has put a two more Lease Option deals away this month giving him and his wonderful family an extra $25K surplus cashflow per year. Imagine if you had a few good Lease Options under the belt like Steve does and what that could do for you?
- look at applying any extra cash you get from savings, cashflow sources above, inheritance money etc, to reducing your debt.
Financial Freedom
The strategies you choose and actions you take determine your success and failure. It is ok to choose the path towards financial freedom and to get help along the way.
The day is today – the day in which you regain control over your financial portfolio.
News today is Bridget has done an amazing job on our garden over the past couple of days. Box hedging, brustics fencing done and cabbage trees and a variety of other small shrubs planted. I was stoked I didn’t get home too much later as the sun was setting, so I could see the impact. What a Massive day she and her Mum had. It is great having them transform the outside, after Bridget and I got our team to transform the inside of our house.
Otherwise my toy arrived in time for the rugby world cup. I am a massive rugby fan, so I figure why not watch it in style. For I bought a new 55in LCD TVand it rocks! I have balanced this as Bridget doesn’t like rugby much, so been busy buying lots and lots of DVDs lately too. Visual pleasure.
News just to hand is that NZ has demolished Kenya in the ICC 20/20 International Cricket Tournament – the shortest game of 20/20 international cricket ever, with Kenya being rolled for jsut 73 including 6 ducks and 4 wickets for 7 runs for Mark Gillespie – magic.
Work tomorrow sees a Massive push to finish three jobs, and due diligence on an exciting development in beautiful Taranaki and on a couple of sections in central Auckland.
APIA Keynote Monthly Meeting Last Night
What a special night we had at APIA. Dr Don Brash addressed us and provided some highly advanced macroeconomic analysis and warned us about some house price reductions in certain cases (watch out apartment investors), the effect of New Zealanders being net spenders and not net savers, and John Banks told us some stories about his propertyand Business investments and talked about ineptitude in the Akld City Council. I had the opportunity to briefly talk to them both – so I took it. They are fascinating men and indeed great friends. They also share positions on the Board of Huljich Wealth Management (www.huljich.co.nz).
I loved the story of the Queen Street footpath upgrade from John Banks. It has gone well over time and over $20 million of the initial budget. They did both sides of the footpath at the same time which has hurt Queen Street retailers badly. And now the water mains under these hugely expensive footpaths are leaking! The lefties that run Auckland City Council do not treat ratepayer/council money as their own and this shows with numerous other projects. Who here knows if Auckland City ratpayers are meant to pick up the tab for the Eden Park upgarde for the Rugby World Cup IRB requirements?
John Banks will be getting my vote and I highly recommend all eligible voters in these local government elections vote, and vote Banks to open the books, cut stupid spending and give the central government a hard time.
Pavarotti’s memories will live on
After 40 years of Lucianno Pavarotti performing opera and 71 years of life Lucianno Pavarotti passed away today. The sheer power the might tenor brought to Nessun Dorma (from Puccini’s Turandot) in the Soccer World Cup 1990 in Italy was enough to get me Interested in Opera. I started learning the guitar the following year and actually asked my parents to join them at Opera and Musicals after that. Whilst I love and prefer pop music, the magic of a night at the Opera canot be underestimated. The history of previous performers and mesmering voice with full orchestral accompaniment is so powerful. (Here’s Nessun Dorma live and made to be played loud – note go to http://www.youtube.com/watch?v=VATmgtmR5o4 if my 20 minutes of tinkering do not come to fruition and this doesn’t play smoothly first time)
Pavarotti also performed with U2 to sing Miss Sarajevo in 1995 that stormed the pop charts. He was a strong supporter of charities and a true superstar of Opera and indeed the music industry. RIP Lucianno.
Finance Companies going under
Yes many finance companies have gone under recently. Listening to some Newstalk ZB talkback on my drive arounds (I do a lot of driving checking properties under contract, meeting clients on site, development professionals and contractors etc) I am concerned that many people think finance companies collapsing mean the market is collapsing too.
That is not the case. The property market is not collapsing, and some commentators views that the market will fall by over 25% in the next year are sensationalist and over the top to say the least. Sure the boom times simply cannot continue as they are now too far ahead of the underlying fundamentals, but a NZ collapse is most unlikely to happen. Yes, some investors and home owners have over extended their borrowing and do not have sufficient non rental income sources to cover their Mortgage payment, or face having to sell their properties.
It is no secret that some property owners are finding things tough at the moment. I know an investor that had fixed 4 years ago $1 million of borrowing at 6.5% that is going to be refixed at 9.2%. Yes they need to get another $27,000 per year to cover this increase that hits them next month.
Questions I have been asked by investors include – what happens to the money I have borrowed from my finance company which is in receivership? Generally no issues here, your loan continues as is. The receivers may try to revive their struggling companies, however they are likely to sell their “book” (your loan is an asset to them) to a number of well heeled parties that may sniff a bargin. It may get taken over by another lender.
Will other finance companies fall? Yes they will. However the Securities commission has now stepped in and is seeking statements of finance companies health. Some that have not provided such statements to date and that their are rumours about, are on thin ice and summer is fast approaching.
What happens to my money I invested with Bridgecorp/LDC/PFS/Nathans finance etc? You may get it all back, but after receiver’s fees are paid (they are protected by law to be paid first, then secured creditors etc), you are likely to get back just a portion of what you invested, aka the Metropolis junk bonds from 2002. My advice is look for reputable providers that you can trust or invest in property via a listed managed fund (eg Macquarie Goodman property Trust, Kiwi income property Trust etc).
So don’t worry too much about these finance companies collapsing. The property market is not soaring up like it has in previous years – so lesser prepared people will be suffering more pain at the moment. Also NZ will not have the lending issues in the sub prime market such as what happened in the USA recently. The reason is the no financials self declared income products did not have the overly “keen” levels the lenders provided in the US – I am advised that one provider gave 100% finance with non financials and self declared income! In NZ no financials and self declared income products were at much lower levels (typically 60-80%).