Lessons we could learn from long term investors

[whitt]

Hi it has come apparent to me that this forum is full of alot of knowledgable investors. And that there are a few long term investors here that have learnt some valuable lessons along the way that prehaps we could learn from during the downtimes.
Eg. Kieran even mentions in other posts that things got tight during a previous slump for himself.
What I would like to know is if you have had tighter times during a previous slump was it due to:

• -Highly leveraged and what was this LVR level prior to slump.
  -Poor cashflow before the slump eg. negative, neutral, slightly positive then the slump made it worse.
  -All borrowings with one bank.
  -Interest terms and types not spread. vunerable to rate spikes.
  -Poor houses which attracted bad tenants. eg The lemon.
  -Sharemarket crash of '87.
  -Any other factors.

And how did you overcome these downtimes?

[kieran]

Here are the reasons that applied to my situation in the early 1990's pre the early '90's slump:

-Highly leveraged and what was this LVR level prior to slump.
-Poor cashflow before the slump eg. negative, neutral, slightly positive then the slump made it worse.
-Interest terms and types not spread. vunerable to rate spikes.

1) My leverage was high at 80% pre the slump... (90% including short term debt) but my lack of equity never affected me during the slump...
2) My cashflow did though and was limited (I was in a job) and geared up to my max borrowing capacity - based on cashflow. In real terms I had negative cashflow (I thought negative gearing was the way to go!) . Of course no-one told me that rents may actually decrease! so when they did I was hurting - plus the usual tenant dramas that seem to occur when you can least afford them!
3) Interest rates were fixed BUT it wasn't that I was vulnerable to rate hikes but I was fixed at high rates (@14% from memory) whilst interest rates were falling (by the way so were property values!)
4) I was young-er then and aggressive in my risk profile so I had quite a bit of short term debt too (i.e. Personal loan and credit card debt which I used to help buy property)

CASHFLOW was the issue for me even though I had little equity.
At one stage I was even in a slightly negative equity position based on saleable market values!!!
But fortunately due to my limited exposure to the bank I had funded with they never questioned the value of my portfolio. I had only been investing for a few years so hadn't had a chance to buy too many properties.

Here's what I believe saved my skin through that tough time:
1) I sacrificed EVERYTHING I COULD and lived on a tight budget (No dinners out, movies, holidays etc for me for a few years back then!)
2) My refusal to sell up and take a loss.
3) My limited bank exposure meaning I went unnoticed as long as I kept my repayment history clean which I did (see point 1)

I guess it's also tenacity, a willingness to 'take my medicine' (yuk!) and the attitude of never giving up that saved me from financial ruin at that tenuous time!

Read the saying below by Donald Trump... it says it all!

[Gerrard]

2) My refusal to sell up and take a loss.

Hi Kieran - I'm interested that you refused to sell up and take a loss. Was this because you had good properties and could see a future in them? Or did you have a few lemons that you really should have got rid of?

Many people/books suggest if you have a lemon property, get rid of it as soon as you can to limit your losses / exposure in the future.

Cheers
Gerrard

[orion]

-Highly leveraged and what was this LVR level prior to slump.
-Poor cashflow before the slump eg. negative, neutral, slightly positive then the slump made it worse.
-All borrowings with one bank.
-Interest terms and types not spread. vunerable to rate spikes.
-Poor houses which attracted bad tenants. eg The lemon.
-Sharemarket crash of '87.
-Any other factors.

Hi Whitt, my first property was a 2 x 3 brm rental property that I bought in 1989. It was in an area that everyone I spoke to - who I thought would know (agents, bank people, financial planners, lawyers, accountants etc), said would be an excellent capital gain area. I paid $128,000 for it, it was the first one I looked at, not sure what the real market value would have been. Rents were $180 & $170 p.w. so cash flow was fine. I put in $25,000 of my own savings + another $10,000 borrowed on interest only from a lawyer. I sold it 7 years later for $94,000 when rents were $120 each unit. So, a loss of approx $40,000 and lots of headaches. I may have been close to a negative equity position at some stages, not sure but I kept up bank payments at all times. I was a mechanic earning about $550 a week after tax at the time and 1 tenant owed me $1800 and another one was paying me back $2200 after moving out, as this is what she was behind in rent.
I learnt a huge amount from that one property deal, lots of mistakes that I never made again.
Some lessons learnt: -
know the market well
only talk to successful investors
buy below market as much as possible
don't buy in slum areas
know what you want
set your investing rules
have sufficient cash flow from elsewhere if interest rates rise, rents go down and if you have a few vacancies (especially on your first 1 or 2 deals)
always use P & I
don't do negative gearing (this one wasn't)
treat it as a business

Regards
Graeme Fowler

[Gatekeeper]

don't buy in slum areas

Ha ha, that made me have a chuckle. My first rentals were in a right slum back then, Petone, 1981. Villas converted into flats, I paid $30,000, but looked at plenty for under $20,000 (wheres my time machine ) . I spent $1500 renovating top to toe, painted it inside and out, carpeted, wallpapered, doubled the rent and sold after 30 months for $78,000.
I saw the old place sold last month for $375,000, someone turned it back into a house, and it looked great. It did have good bones
So slums can be good.....................sometimes.

[orion]

My first rentals were in a right slum back then, Petone, 1981.

Mine were even worse I think - Stokes Valley in a bad street.

Regards
Graeme Fowler

[Glenn]

Well I think (sometimes) that if you are young keen and not afraid of the big bad wolf you should buy a moderate investment in the slum first time round.
You at least will learn in a short period of time what it can take years to learn with nice stuff. now just look at what Keiran learnt.
Also the slums if managed well, with no rent defaults more than a couple of weeks in arrears before you evict them, has the capacity to give you a real good start along the way.
I got a downer in income a few years ago. One of my long term commercial tenants was going to give notice. So I said stay on and I will slash the rent by 25%. They stayed and a couple of years later paid full market rates again. I still have them and they recently asked to stay on for another 10 years. During the period the rent on that place was lower many other landlords had to put up with empty properties.
So I got to still eat out, it just was not as often and as good.
Far too many landlords do not look before they leap.
Beware there are sharks and big spikes at the bottom of the well.
Better to eat Mc Donalds than nothing at all.

[Gatekeeper]

Also the slums if managed well, with no rent defaults more than a couple of weeks in arrears before you evict them, has the capacity to give you a real good start along the way.

Until last year I had never lost a weeks rent, never even had any arrears to speak of that wasn't fixed up during the next week. I know that sounds unbelievable after the stories I hear in here, but thats how its been for me. Guess I've been lucky. My mother was the local bailiff in the 80's so it would have been handy if I'd needed it.

I do my places up pretty trendy and aim for young professional couples, approved pets is also good, if you get can get a good tenant, they tend to stay long term. My best was seven years. I've only ever done 1br and 2br, so I had a target market.

Never had any beneficiaries till last year when I let in a grandson of an neighbour of mine, it was over in three months and that was my first time at tenancy services and then to the tribunal, he never turned up once. I get $10 a week now for the next few years. I had a rule never to rent to friends and family, and broke it. Bad move.

[GreatPig]

Stokes Valley in a bad street.

Stokes Valley was a slum?

I had an aunt & uncle living there in the 60s and 70s, on the Western Hutt Rd, and it seemed okay then.

Not that I had any idea about property values in those days...

GP

[whitt]

Thanks for the lessons Kieran and Graeme.

I first bought in '98 at market value (lesson #1) and prices did not change for years (By my calculations I probably bought in a slump). So had a few tight years till cashflow loosened up a bit (Lesson #2).
I learnt alot since then and seem to have good cashflow in my portfolio now to line me up to survive any downtimes ahead.

I guess that time will tell if that is enough.

[kieran]

I'm interested that you refused to sell up and take a loss. Was this because you had good properties and could see a future in them? Or did you have a few lemons that you really should have got rid of?

If I had sold up I would have still owed the bank money... hence I refused to sell up and take the loss. I believed I was better off to hold than sell not because they were good or bad properties but because selling would have wiped my entire net worth out and more...

Many people/books suggest if you have a lemon property, get rid of it as soon as you can to limit your losses / exposure in the future.

I disagree because of my personal experience. One ppty I had during my tough times was a lemon (wrong side of road, cheap and nasty reno, high maintenance etc) but I held it till 1997 when values had peaked and sold it then for $189,000. 5 years earlier (1992) it was only worth $70,000!!! So by the people/books you refer to I should have sold it in 1992... Mmmm, I don't even want to think about it!

[Andrew]

Hi Whitt

There are some really good points coming out here and I thought I’d add my two cents worth.

I was fortunate to start investing in property in the middle of the 80’s when everyone else was buying shares. Property prices were rising, but only a little as interest rates were high at around 22%. However yields were high as well. I bought a little flat near Kelburn in City fringe Wellington for $43,000. It was under rented at $90 per week and I used the low yield of 10.9% (yes that was a low yield in central Wellington at the time) to negotiate the price down. The guy just wanted to get his money out of property to invest in the share market. Enough said about that.

I renovated the place for around $1,000 and increased the rent to $140 per week, increasing the yield to nearly 17%. Even with this kind of yield and a 20% cash deposit, I still had to top it up a little. However when interest rates went down to 15% everything was rosy. I learned that if you can buy property when things are hard you are more likely to hold on to them and really achieve something.

Since then I have seen many people lose on property and it is nearly always because they buy when things are rosy. Property prices are rising, rents are good, interest rates are low and the stars are all aligned. They borrow to the hilt and then when conditions turn for the worse they cannot maintain their position. They have assumed that market conditions will remain the same and failed to plan for anything else. A great shame for the individual but a great buying opportunity for the experienced investor.

I think every investor should think that they are in the property business and make a property plan, just as you would make a business plan if you were in any other business.

Petone is an interesting case, much like Ponsonby in Auckland. They were both low income areas in shabby condition, but they obviously had great locations which meant that they were unlikely to stay low income areas for very long. Picking when an area is a slum or merely undervalued shows true vision.

[fudosan]

Hi Andrew,

It's a blessing that we have very experienced people like you. It's like attending property seminars without having to pay any fees!

Do you feel we are heading towards bad time again? In today's NZ Herald, Brain Fallow reported that the household saving rate is -9.5%, compared with -3% two years ago, and -0.8% two years before that.

It appears that the hyper-low interest rates have fueled excessive borrowing and consumer spending, pushing up house prices and making the economy look strong. However, when the interest rates go up, which is happening now, will many people have to sell up and pay their debts?

Interesting, this week's Buttonwood column on The Economist website
http://www.economist.com/agenda/disp...ory_id=2764337
paints the same picture about the US.

I hope the market will come back to its sense so that I can buy more properties. Regards

[Gatekeeper]

Petone is an interesting case, much like Ponsonby in Auckland. They were both low income areas in shabby condition, but they obviously had great locations which meant that they were unlikely to stay low income areas for very long. Picking when an area is a slum or merely undervalued shows true vision.

Petone was in a bad state in the early 80's, a lot of the old places still had fireplaces in every room, sarking, and coppers to boil the washing .
A lot of the places I looked at during my hunting belonged to the Church, who apparently had previously rented them to the islanders who came in to work at the Ford car plant or the smelly Gear meat works in the main street with all the offal flowing out at Petone beach . Petone couldn't get any worse, and when the meat works was closed, and most of the big factories closed down (or moved to Wiri ). Rejuvinated villa's started popping up and away it went. It takes awhile for the stigma to wear off and away you go. My family have buildings in Jackson Street.

[fitboy]

Hey everyone

All you experienced investers keep these stories coming, us new kids love this stuff.

See ya

Fit guy