Advice Appreciated - Many thanks in advance!

[kiwikid1]

Hello everyone, I have read this forum on and off for years, and appreciate any suggestions from allcomers....

Firstly a short background....

I left NZ in 2004 at a time when I was at a cross roads between jumping headfirst into property investing, or doing my OE, ( I was 28, had a chunk of money saved and itchy feet).

...I chose a hybrid of the two, and bought a section at one of the southern lakes with the rational that there were no hassles with tenants etc while away and basically gambled on capital growth. I know I know, foolish choice, but its a good learning experience....still own the section, mortgage has been halved and have around 60% equity currently. Theres been a glut of farms chopped into sections and the local supply of sections far exceeds demand. I am resigned to being stuck with it for the timebeing as its not painful enough to sell at a loss.

Anyway I am back in nz for a 2 month period, my income in £'s is approx 200K NZD, no other debts and 20-30K available to invest with, plus the equity in the section. The plan is to by 2 properties using as little of my money as possible while back in nz, both neutral - positively geared, using the section equity as deposit for one, and my own cash for number 2 and any minor cosmetic renovations, fees etc.

My question is - given that the section is a lemon, should I steer clear of using any additional equity available in the section to purchase one of the properties? My thinking is so long as its not negatively geared the total cost of the house will be covered by rent, and I'm putting a lemon investment to good use......any opinions on this appreciated. To leverage or not to leverage?

My market is Christchurch as I know the city well and rented as a tenant myself for a number of years and understand that market. However after buying hastily last time (am from the southern lakes area originally) and knowing I have 2 more months here to put my plan into action I am second guessing my instincts and being a bit cautious.....this time around I want to take a good hard look before leaping without missing the boat altogether.

If this goes well I will be in a position to buy another 2 in the new year while home with savings from the uk, with the goal of two more houses every quarter for 2009, after which time I'll return home. Im not looking to make a quick buck by timing the market or any other speculative talk which led me astray the first time around. I'm just looking to buy a few good solid renters while the market is slumped and Im earning good money to get me started.

Apologies for the waffling explanation!! Any guidance appreciated, my error the first time around has badly knocked my confidence.

Thanks all!!

Kiwikid.

[spurner]

Hi

There is a saying "Sell the worst investments, and keep the best", unfortunately people tend to hang on to poor performing investments.

I assume your section is not producing any income, and is in fact costing you money just to own it. The banks will loan you more money for new purchases if you sell it and have cash as a deposit, as opposed to securing against a vacant section which is in oversupply. From a servicing point of view you will also be in a much stronger position. There is no logical reason to keep it.

I'd say zipping back to NZ for 2 months with the intention of buying 2 positively geared properties is pretty optimistic, especially considering your experience.

I'm glad you're considering a different type of property this time around though.

Good luck, and let us know how you get on either way!

[kiwikid1]

I hear you Spurner, however perhaps I should restate my position, the section would not be sold in this market unless I took a 20-30k loss. (fees and 3 years servicing costs approx) As the mortgage has been paid down to 50% and is serviced in pounds, I see no reason to do this in the current environment. Thats like telling someone to sell their shares when the sharemarket just crashed, and chrystallising their losses. I agree with you its not logical to keep it, however I am not prepared to lose money on it and sell it at a loss either in the current market creating a debt which has no security. This would also suck up the cash I have to purchase the second property in repaying the debt and I would be left with no section, no cash and no rentals either....forgive me if I have misinterpreted you? My intention is to get rid of it eventually but I prefer to hold it until I at least break even.

I agree it's optimistic to buy two positively geared properties but I figure why aim low, I have the luxury of looking for deals full time while Im in NZ so why not go for it? If it dosent work out then I'll have learnt alot and can review my strategy.

Thanks for the feedback, please let me know if I have misunderstood you?

Cheers

[SuperDad]

Hi Kiwikid.

My first stop in your position would be a good mortgage broker, who really understands property investment.

Paul.

[kiwikid1]

Hi Paul, I spoke to a broker today, he recommended leveraging the section to keep each deposit at 20% and avoid cuamic (sp?)interest on the loans for being over 80%, but he really just encouraged me to use asb as he thought they were the easiest to deal with when borrowing when offshore. I'll spend an hour or two today speaking to some different brokers.

Thanks for your message

[princess]

Hi KiwiKid,

Firstly good on you for getting to the position you are in now, must be a nice feeling :-)

We are also in the position of having bought a lemon - i won't go into the details but its not enjoying capital growth for a number of reasons, and its costing us each month to own it. However, like you, its not hurting too much and we have some equity in the place so are not keen to sell at a loss unless we are really up against the wall, which we are not. If you love the section and have options for it later on, keep it... but be open to other suggestions from people who are in a position to help you (banks, brokers etc)

I would love to be buying more investment property in this environment, but we have decided to plough our incomes into getting rid of the loan on our family home, and doing all the renovations we want to do there... setting ourselves up should things get a lot worse economically. (There is every chance they will)

Although cash+ properties are still hard to come by if you are looking full time, in the right places, you should find some good deals.

Get a great broker, a great accountant and some intelligent REA's on your team... you will have seen the advice before but you must insist on only dealing with the most successful agents in your area. Deal with a numpty and you're wasting your time.

[SuperDad]

I would love to be buying more investment property in this environment, but we have decided to plough our incomes into getting rid of the loan on our family home, and doing all the renovations we want to do there... setting ourselves up should things get a lot worse economically. (There is every chance they will)

That strikes me as a very wise plan.

This is pretty much what my wife and I are doing right now.

One good thing about having a house that requires renovating is that it is a good insurance in this market. If one can increase the value of the property by $3 for every $1 spent, then that increase in value should help counter negative growth.

Paul.

[princess]

Thanks SuperDad - I always appreciate your comments. It feels so safe and boring to do what we are doing, when other investors are getting excited about the bargains!

I am looking forward to having a home that i love though.

[SuperDad]

I'm the same princess - I am looking forward to living in a house that I love.

Well, I already love our house, but it wil be so much better once the renos are done.

Last week I removed a really ugly mural from our living room wall. After 18 months I was sick to death of looking at it. I'll post a photo as soon as I learn how to.

Paul.

[SuperDad]

It looks like the gallery is closed for maintenance, so I'll have to leave the photo for another day.

Paul.

[artemis]

Get a great broker, a great accountant and some intelligent REA's on your team... you will have seen the advice before but you must insist on only dealing with the most successful agents in your area. Deal with a numpty and you're wasting your time.

Successful agents will get the best price for the vendor. Sometimes (only sometimes) it works for the buyer to use a crap agent.

[k1w1]

A bit Hilda Ogden-esque was it, SuperDad?

[kiwikid1]

Thanks everyone for the sound advice, Princess it's nice to know theres others with similar situations, and Paul the 1-3 rule is a great one.

I work in investment banking and having seen, and continue to see the credit crunch play out, I think it has a very long way to go yet also. A useful website that people on here may not be aware of is
hereisthecity.com you can subscribe to a daily email. This is for people working in the "city" of london working in finance, and while it leans towards the gossip side of things, regularly has info on which banks and hedge funds are having problems etc. They are provided info anonymously by staff working at the investment banks.

Thanks everyone, much appreciated

[Glenn]

The smart thing is to talk to an accountant.
Forget the advise of mortgage brokers and agents for this sort of stuff.
You need to somehow incorporate the loss making lemon into the profit making new investments.
(Just aside have you ever noticed we all think any investment we make will make a profit in the future).
Anyway the IRD are a bit touchy about investment properties like empty sections and their losses. This is why I suggest the first stop should be an accountant to help you get the structure right first.

My guess is the best way might be to pay down the section mortgage and then remortgage it for the new investments. This way money is being raised to buy an income producing asset. The last thing you want to say is you purchased the section to make a capital gain.

[kiwikid1]

Great advice Glenn, thankyou. I'm definitely green when it comes to the the IRD and tax structure side of things. What you suggest sounds very sensible.
Funnily enough I can see me having a holiday house on that section a long way down the track, it's a beautiful area.