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The path to property wealth
Sunday Star Times | Sunday, 11 January 2009
Trump's principles of location: great views, prestige, growth potential and convenience.
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PROPERTY INVESTING is a popular sport in New Zealand. Surveys suggest about 15% of households have at least one investment property while a horde of authors and seminar presenters offer advice on how to join the ranks of the landlording gentry.
Of the 178 entries in last year's Rich List, 35 were in the property business more than any other category.
Many, it seems, walk the path to property wealth although few reach their destination. Of the thousands of landlords in New Zealand, an estimated 62% own just one or two properties.
So what's the difference between the mega-rich property tycoons and the small-time investors who attend seminars and read self-improvement books?
First of all, it's worth noting that residential property investment the favourite vehicle of the seminar-goer is rarely a mainstay of the tycoon.
For those 35 Rich Listers, the bulk of activity is in commercial property and development, not in building portfolios of residential rentals.
Property investor and Rich Lister Peter Francis started out in 1969 with blocks of flats but moved on quickly to commercial. Why? "I just got sick of the hassles of dealing with tenants in flats. They come and go much more often, you get tenants that run on you, and they break things. They ring you up, the washer's gone on the tap and they want you to fix things. That's a real management role and I wasn't very good at it."
With commercial property, tenants tend to be longer term and more reliable. Sir Robert Jones, probably New Zealand's foremost property investor, describes dealing with commercial tenants as a "huge attraction" compared to residential, owing to their "sensible and business-like" approach.
"I'd rather boil my head in oil than be a residential property landlord," he wrote in his 2005 investment tome My Property World.
Jones, who bought his first property in 1962, has some useful things to say, not least in distinguishing between investing and developing.
The latter, he says, is "a licence to go broke". He likens developers to market gardeners, who dig up their produce for sale only to go through the whole rigmarole of planting and nurturing and digging up again the next year. Investors are like orchardists, who spend money on trees and just harvest year after year.
Francis dislikes development but for a different reason. "It's a horror story these days and I'm getting out of it. It's just the resource consent, the time it takes is just a joke. Anyone who does development today needs their head read. There can be very good money made in development, don't get me wrong, but by the time you get your approvals through the whole market can change. The time frames are just too long."
Wanaka-based developer Bob Robertson describes Jones's views as "a bit arrogant". "There's a business to be had in building things," he says, pointing out that if developers didn't develop, people like Jones would have nothing to buy.
Robertson was already an experienced and successful businessman when he started developing and says the same principles of business apply to property. Chief among these is marketing skill understanding market demand and knowing how to sell.
"The easy part is designing and building," he says. "The hard part is getting it sold. Our ability to understand the marketplace from a marketing perspective helps us more than having technical knowledge on building."
Developers like Robertson can make a great deal of money from small beginnings Robertson is now working on projects valued in the billions but they also take on more risk than most people would be comfortable with.
The development versus investment distinction is an important one. "Buy and hold" investors like Jones are taking advantage of the unique attributes of property long-term it is an income generating asset whose capital value tends to be inflation proof. Professional property investors therefore usually buy for yield more than capital gain if you have a good income-producing asset the only reason to sell it is to buy a better one, and those opportunities may not arise often.
"We never sell," says Jones. "An extraordinary event must occur to justify that, and that's not happened."
Likewise American tycoon Donald Trump who, although also a developer, seldom sells assets if they generate good income. As an investor he treats property management like a customer service business keep your tenants happy and the money keeps flowing in. Jones has the same view.
In this regard the professionals appear distinct from the amateurs. A 2003 survey of New Zealand landlords found the most frequently cited benefit of property investment was capital gain (38% of respondents), not income (32%).
Statistics tend to support the professional approach. Property Council data indicates commercial property price growth of about 2% a year in real terms for the past 15 years, while income yields averaged about 6.5% real.
On residential property the differentials have historically been similar, with gains of about 2.8% and yields of about 6%.
So if property investing, as opposed to development, is mostly about yield, how do you get rich? A great deal of the answer is about debt and smart buying. Within the overall figures there are large variations from time-to-time and place-to-place.
Interest rates are a key factor for property investors the higher the interest rate, the harder it is to find property with high enough rental yield to pay interest on the debt used to buy it.
When Francis and Jones made their first inroads, conditions were perfect. "You could borrow money at around 7% and buy properties yielding 10," says Francis. "Those were the good old days. I was able to borrow enough money at good interest rates and get a positive yield." By positive yield, Francis means rental income more than covers his interest costs unlike the amateurs, professional investors don't buy unless this is the case.
By 1974 it would have been much harder to find deals like that a huge price surge had driven residential yields down to 6.5%.
Timing, then, is one of the factors in a good buying decision as the market goes through its cycles.
Jones has a handle on the others. "The golden rule of property and the older I get the more that gets reinforced is location. In the southern hemisphere the ideal office building for example is a north-facing corner, preferably a northwest corner. You simply can't miss through thick and thin and history supports it."
The Rich Lister's wealth has also grown by "knowing a lot about [properties], and recognising when they're significantly undervalued, as they are right now. What an investor's all about is trying to read the future".
Trump's principles of location, summed up by his legal adviser GeorgeHRoss, are equally succinct: great views, prestige, growth potential and convenience. Of course this means investors tend to want the same properties, so the successful are the ones who can figure out how to maximise their earning potential.
In this respect, Trump goes further than most. He famously once made a costly purchase in New York viable by taking advantage of the small print in the city's zoning rules. Although he was technically permitted only a 34,000m2 building on the 3400m2 site, he managed to acquire the air rights over other buildings on the same block allowing him to put up the 63,000m2 Trump World Tower.
Jones doesn't go that far, but he does spend a lot of money improving his buildings and, as he puts it, "correcting architects' mistakes".
As well as property nous, there is another factor that works in successful property investors' favour many of them were rich to start with. This is a great help, particularly in the higher stakes world of commercial property.
Jones, for example, got into it after making money in publishing. "I made a hell of a lot of money very quickly and then I had the dilemma of what to do with it. I got persuaded to buy a small building in the Hutt. And I was fascinated how quickly it doubled in value. Suddenly agents were pestering me nine months later offering me twice as much, and it seemed so easy."
In a raging bull market, maybe it was. Repeating the trick through thick and thin is anything but.
Sunday Star Times | Sunday, 11 January 2009
Trump's principles of location: great views, prestige, growth potential and convenience.Related Links
PROPERTY INVESTING is a popular sport in New Zealand. Surveys suggest about 15% of households have at least one investment property while a horde of authors and seminar presenters offer advice on how to join the ranks of the landlording gentry.
Of the 178 entries in last year's Rich List, 35 were in the property business more than any other category.
Many, it seems, walk the path to property wealth although few reach their destination. Of the thousands of landlords in New Zealand, an estimated 62% own just one or two properties.
So what's the difference between the mega-rich property tycoons and the small-time investors who attend seminars and read self-improvement books?
First of all, it's worth noting that residential property investment the favourite vehicle of the seminar-goer is rarely a mainstay of the tycoon.
For those 35 Rich Listers, the bulk of activity is in commercial property and development, not in building portfolios of residential rentals.
Property investor and Rich Lister Peter Francis started out in 1969 with blocks of flats but moved on quickly to commercial. Why? "I just got sick of the hassles of dealing with tenants in flats. They come and go much more often, you get tenants that run on you, and they break things. They ring you up, the washer's gone on the tap and they want you to fix things. That's a real management role and I wasn't very good at it."
With commercial property, tenants tend to be longer term and more reliable. Sir Robert Jones, probably New Zealand's foremost property investor, describes dealing with commercial tenants as a "huge attraction" compared to residential, owing to their "sensible and business-like" approach.
"I'd rather boil my head in oil than be a residential property landlord," he wrote in his 2005 investment tome My Property World.
Jones, who bought his first property in 1962, has some useful things to say, not least in distinguishing between investing and developing.
The latter, he says, is "a licence to go broke". He likens developers to market gardeners, who dig up their produce for sale only to go through the whole rigmarole of planting and nurturing and digging up again the next year. Investors are like orchardists, who spend money on trees and just harvest year after year.
Francis dislikes development but for a different reason. "It's a horror story these days and I'm getting out of it. It's just the resource consent, the time it takes is just a joke. Anyone who does development today needs their head read. There can be very good money made in development, don't get me wrong, but by the time you get your approvals through the whole market can change. The time frames are just too long."
Wanaka-based developer Bob Robertson describes Jones's views as "a bit arrogant". "There's a business to be had in building things," he says, pointing out that if developers didn't develop, people like Jones would have nothing to buy.
Robertson was already an experienced and successful businessman when he started developing and says the same principles of business apply to property. Chief among these is marketing skill understanding market demand and knowing how to sell.
"The easy part is designing and building," he says. "The hard part is getting it sold. Our ability to understand the marketplace from a marketing perspective helps us more than having technical knowledge on building."
Developers like Robertson can make a great deal of money from small beginnings Robertson is now working on projects valued in the billions but they also take on more risk than most people would be comfortable with.
The development versus investment distinction is an important one. "Buy and hold" investors like Jones are taking advantage of the unique attributes of property long-term it is an income generating asset whose capital value tends to be inflation proof. Professional property investors therefore usually buy for yield more than capital gain if you have a good income-producing asset the only reason to sell it is to buy a better one, and those opportunities may not arise often.
"We never sell," says Jones. "An extraordinary event must occur to justify that, and that's not happened."
Likewise American tycoon Donald Trump who, although also a developer, seldom sells assets if they generate good income. As an investor he treats property management like a customer service business keep your tenants happy and the money keeps flowing in. Jones has the same view.
In this regard the professionals appear distinct from the amateurs. A 2003 survey of New Zealand landlords found the most frequently cited benefit of property investment was capital gain (38% of respondents), not income (32%).
Statistics tend to support the professional approach. Property Council data indicates commercial property price growth of about 2% a year in real terms for the past 15 years, while income yields averaged about 6.5% real.
On residential property the differentials have historically been similar, with gains of about 2.8% and yields of about 6%.
So if property investing, as opposed to development, is mostly about yield, how do you get rich? A great deal of the answer is about debt and smart buying. Within the overall figures there are large variations from time-to-time and place-to-place.
Interest rates are a key factor for property investors the higher the interest rate, the harder it is to find property with high enough rental yield to pay interest on the debt used to buy it.
When Francis and Jones made their first inroads, conditions were perfect. "You could borrow money at around 7% and buy properties yielding 10," says Francis. "Those were the good old days. I was able to borrow enough money at good interest rates and get a positive yield." By positive yield, Francis means rental income more than covers his interest costs unlike the amateurs, professional investors don't buy unless this is the case.
By 1974 it would have been much harder to find deals like that a huge price surge had driven residential yields down to 6.5%.
Timing, then, is one of the factors in a good buying decision as the market goes through its cycles.
Jones has a handle on the others. "The golden rule of property and the older I get the more that gets reinforced is location. In the southern hemisphere the ideal office building for example is a north-facing corner, preferably a northwest corner. You simply can't miss through thick and thin and history supports it."
The Rich Lister's wealth has also grown by "knowing a lot about [properties], and recognising when they're significantly undervalued, as they are right now. What an investor's all about is trying to read the future".
Trump's principles of location, summed up by his legal adviser GeorgeHRoss, are equally succinct: great views, prestige, growth potential and convenience. Of course this means investors tend to want the same properties, so the successful are the ones who can figure out how to maximise their earning potential.
In this respect, Trump goes further than most. He famously once made a costly purchase in New York viable by taking advantage of the small print in the city's zoning rules. Although he was technically permitted only a 34,000m2 building on the 3400m2 site, he managed to acquire the air rights over other buildings on the same block allowing him to put up the 63,000m2 Trump World Tower.
Jones doesn't go that far, but he does spend a lot of money improving his buildings and, as he puts it, "correcting architects' mistakes".
As well as property nous, there is another factor that works in successful property investors' favour many of them were rich to start with. This is a great help, particularly in the higher stakes world of commercial property.
Jones, for example, got into it after making money in publishing. "I made a hell of a lot of money very quickly and then I had the dilemma of what to do with it. I got persuaded to buy a small building in the Hutt. And I was fascinated how quickly it doubled in value. Suddenly agents were pestering me nine months later offering me twice as much, and it seemed so easy."
In a raging bull market, maybe it was. Repeating the trick through thick and thin is anything but.
