Posts Tagged ‘trading and buy & hold’
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?