Property Investment Different Strategy

[orion]

Hi Graeme,

A few questions for you if you don't mind answering:

1. You have obviously been very successful in property investment over the years. When do you get to the point where doing a buy, renovate, sell for $20k profit is not worth it? You must have enough income coming in each week to do what ever you want in life but you continue to buy properties in Hawkes Bay for renovation. Is this because you enjoy doing this more than anything in the world or because you want to accumulate more money?

2. Has your desire to create a real estate empire effected other parts of your life for the worst? In your book (which I've read several times, a great book I might add) you mentioned property investment has had detremental effects on your health and family relationships at times. Do you feel like the time and devotion you put into your property ventures has distracted you from these other things in your life?

3. What are your plans going forward from here? With property investment and life in general?

4. Outside of property investment, what do you enjoy spending time doing?

This might be a bit personal so not problems if you don't feel comfortable sharing things but would just like to know.

Thanks.

Hi House Hunter

Happy to answer any questions

1. Yes I enjoy doing the buying, negotiating and trading pretty much more than anything else. Accumulating more money is just a result of doing what I love to do.

2. At the time of writing the update to the book in 2008 that is what I believed at the time, well family anyway. However now I think the opposite, my partner only gets 5 weeks off a year and has already run out of leave.
We’ve done a cruise around Hawaii, a trip to Malaysia to watch the Formula 1 and we're going on a 9 night cruise (14 of us going) in another couple of weeks. That’s all in less than 12 months and we were supposed to be going to Hawaii again for a wedding in the next couple of months but as I say my partner has run out of leave, but mostly doesn’t want to leave the kids behind, or take them out of school again as they are taking 2 weeks out of school straight after the holidays.
As for health, I still walk for an hour every day first thing in the morning and also run around with the kids at soccer and coach a kids hockey team. So no, property has given me the ability to do all these things, if I was in a 8 – 5 job then a lot of those things would probably not be possible. The last time I was an employee working dollars for hours was 23 years ago.

3. Much the same really, travel as much as I can and also keep buying/selling etc property. In the last 10 months I’ve bought those 9 buy and hold properties in the new trust I set up (since January) and also another 11 properties to trade, reno etc, so 20 in total. It’s fun and I love doing it.
4. Walking, time with family and friends, watching movies, travelling, coaching hockey and relaxing too, probably much the same as anyone else.

[House Hunter]

Fantastic, thanks for the answers.

The main point I wanted to see is if you were doing it for enjoyment or not. I'm kind of the same that I enjoy the journey more than the destination. (i.e. the process of investing and making money rather than the money itself).

[FJW]

Hi Graeme

Your a really inspiring person and I really enjoyed reading your article in the latest property investment magazine along with reading your comments on this post =)

If you don't mind, I have a few questions to ask if your OK with that?

1. What is your buying criteria for a trade?

2. Why would you trade a property opposed to hold it?

3. When cosmetically renovating a property to trade which involves a full interior and exterior paint, new carpet, curtains, kitchen and bathroom how much does that typically cost for a 3 BDR 90 m2? Do you do the work yourself or do you get tradespeople in to do the work?

4. What' the minimum profit you will except in a trade?

5. How long do you aim to complete the reno for the trade and get it back on the market to sell?

6. I understand that if you trade your buy and holds all become tainted that you buy post trading?

Sorry If I've overwhelmed you with my questions

Look forward to your response =)

[orion]

Hi Graeme

Your a really inspiring person and I really enjoyed reading your article in the latest property investment magazine along with reading your comments on this post =)

If you don't mind, I have a few questions to ask if your OK with that?

1. What is your buying criteria for a trade?

2. Why would you trade a property opposed to hold it?

3. When cosmetically renovating a property to trade which involves a full interior and exterior paint, new carpet, curtains, kitchen and bathroom how much does that typically cost for a 3 BDR 90 m2? Do you do the work yourself or do you get tradespeople in to do the work?

4. What' the minimum profit you will except in a trade?

5. How long do you aim to complete the reno for the trade and get it back on the market to sell?

6. I understand that if you trade your buy and holds all become tainted that you buy post trading?

Sorry If I've overwhelmed you with my questions

Look forward to your response =)

Hi FJW,

Thanks or your post and kind words

Yes happy to answer any questions.

1. Buying a property to trade needs to be bought either very cheap or the renovation work that you do needs to add more value to the property than you are spending. I generally will buy properties to trade that if not easily sold, could pay for themselves if they were tenanted.
2. Several reasons – a) wanting cash rather than equity, b) not in an area, street, location etc that I want a rental property, c) a property that needs a lot of renovation work that I would rather sell on again and not keep as a rental property.
3. All depends on the extent of work done. I’ve got someone who does some of my renos and we profit share kind of. She does all the work and gets bargains on Trade Me, House Dismantlers etc, a real bargain hunter and does a very good job. She is doing a talk to a group of investors here (about 80 people) in HB I’ve been helping over the last few months.
One I’m doing at the moment I’m keeping as a rental, purchase price was $88,500 + $2,000 finders’ fee. Getting the exterior reclad as it was Weatherside, also fully painted inside, carpet, new bath, bathroom vanity, taken out old kitchen cupboards, put in new pantry, kitchen bench and cupboards etc.
Total cost will be approx $110,000. Will value to at least $160k, was valued at $175k in 2008.
Have a tenant moving in when it settles at the end of this month at $300p.w. so a yield of just over 14%.
Yes always get tradespeople to do the work. Firstly it saves my time, secondly I wouldn’t enjoy doing it and thirdly they would do a way better job than me.
4. $10,000 would be about the minimum usually, however one I did earlier this year was only about $3,000 - $4,000 I think as I had to buy that one to get another one the same owner had. He wouldn’t sell just the one I wanted. I think the average for the last year out of about 12 trades is $25,000 or so
5. As soon as possible, usually aim to get early access though so no or very little holding costs. Some don’t need anything doing to them, others may take a couple of months or even a bit more.
6. More of an accountant question, but for the buy and holds this year I’ve done they don’t get tainted as long as they are held for 10 years or more from what I understand.

An update on the original post on this thread.
The original plan in January this year was to do 10 properties where the rent would cover the mortgage on a 20yr P & I loan (@6.5%p.a.), rates, insurance and property management within 3 years.
That was done by August, so I decided to change it to 20 properties and have now so far done 18, and hope to have done another 2 by the end of the year. This will give me a total of 60 properties again I don’t want to go over this amount at this stage, as the overall debt to equity ratio will go over 60% if I buy too many more properties, and I want to keep it below that level.
The next plan is to do more renovations/trades to help pay down the existing loans. But even by doing no trades at all, over $275,000 is getting paid off the principle each year which.

[FJW]

Hi Graeme

Thanks for your comprehensive response, your an absolute legend, you must be so proud of your efforts as from what I understand there are very little people around like you doing the deals and bizo so well done mate.

1. Are those deals hard to find? I manage to find 9% deals but haven't yet to find a 10% in Lower Hutt which is where I farm.

2. Sweet

3. Do you put the tradies on labour only? I'm thinking it would be the best way to keep the reno costs down? Or even employing a tradie or getting them to solely contract out to you where you would be able to get a fairly attractive hourly rate?

4. $25,000 k - does that involve redoing kitchens or bathrooms? Or just painting, new carpet, curtains etc?

5. Sure thing, that makes sense. Obviously the house would need to be vaccant though yeah? Whats the longest early settlement you've managed to negotiate Graeme?

6. Sure thing.

Mate thats impressive, like extremely impressive. You should be the one that has the authority to sell P.I advise and commission seminars =)

Look forward to your reply

Fraser

[orion]

Hi Fraser,

Thanks, yes very happy with how things are going for the year.
I think it’s the first time in a long time if ever that I’ve had a million dollar plus year. That’s from cash flow from existing properties, trading, equity in new properties bought this year and principle paid off loans.
A couple of other years (around 2002 – 2004) the overall property values increased over $1 million for a year, but that is more luck than anything else and I don’t ever rely on that happening, in fact I have the assumption when I buy that prices will go down, not up (or hoping they will) like 99% of people.

Answers to your questions to my answers

1. Trading properties you mean? They can be, but they are there if you look. Not sure why you mention yield there though? If that relates to rentals, yes it may be difficult to get more than a 9% yield where you are in Lower Hutt. When I was building my rental portfolio originally, I was happy with an 8% yield so 9% is fine, interest rates are lower now too than they were back then 10 – 15 years ago. You might just want to fund the deposits with renovation/trading profits. Depends also how many you want to buy, what income you want after they are paid off etc, so best to work backwards on what it is you want first and then work out how you are going to do it.
2. –
3. The trades people usually do a quote, none on labour only.
4. Yes it can include kitchens, bathrooms etc. You can often get a good kitchen on Trade Me for under $1,000. Also as I mentioned, it doesn’t always have to involve any renovations. One I bought in the last 12 months I bought it through an agent and sold privately for $29,000 more within a few weeks without doing anything to it. Another I bought privately (not this year) and sold through an agent with 6 offers on it the day it listed and sold for over $50,000 more than what I paid a week earlier, also nothing done to it. Another three this year were bought privately and sold privately with an average profit of nearly $20k without doing anything to them.
5. Yes it does help if it’s vacant but depends on what needs doing to the property. If it’s exterior then that’s fine, also some things can be done with tenants/owner living there. One I did earlier this year, I had the roof painted, new garage door, heatpump put in, and insulation while the owners were living there. The interior painting was done when they moved out, but had access for 4 weeks or so prior to do the other things. Longest is probably around the 2 months mark, but no reason why it couldn’t be longer.
6. –

Yes the whole industry has changed when it comes to that in the last few years, but the seminars I’ve done here this year and all the follow-ups with people have been done for free.

[spaceman]

....
I think it’s the first time in a long time if ever that I’ve had a million dollar plus year. That’s from cash flow from existing properties, trading, equity in new properties bought this year and principle paid off loans.......................

mirin hard

Cheers
Spaceman

[nnf7908]

Greeting to you Greame, and rest of the members in this forum!


I would very interested to know how it will go with your new strategy!
please do keep us updated thanks

i have just started investing in real estate myself and started with auckland central apartments, (been living in city for the last 10 years)
would you tell me your personal thoughts on apartments vs houses i.e. cashflow vs capital gains, ?

it is reasonably easy to find a shoebox with 8% net ROI, but capital gain is pretty much zero
and plus bank lending criteria of under 40sqm apartments with only 50% lvr makes it really hard to implement this strategy?


thanks in advance,

looking forward to your reply

[orion]

Hi nnf7908

The new strategy is going great thanks, I’ve now bought the 20 properties in the new trust, although a few are due to settle in the next week or two.
At the start of this thread I think I mentioned that it’s not something to do when starting out though, was only because I had a good foundation to work from to be able to do this.
I will see if I can add an article I did called ‘Building a Foundation’ about 2 – 3 years ago and will also put a couple of articles on capital gains etc, ones I wrote back in 2004 and 2005.

Auckland is an interesting place to be an investing at the moment and even if I was living there am not sure if I would be, because of so much hype and expectation.
When I buy any property, I ASSUME the market will go down, so I have to make money still if that happens, i.e. my assumption is correct. If it doesn’t go down, or goes up then it’s a bonus nothing else. The problem with prices going up so much like it has done, is that rents don’t usually keep up at the same level, so you end up getting very low yields and then hoping the market will keep going up, that is a total recipe for disaster.
I would say about 80 – 90% of the people I know who used this way of doing things in the early 2000’s ended up losing everything.
I mentioned in an article in the Nov Property magazine about a friend of mine being at a birthday party in Auckland last year. There were about 60 people there and pretty much all were millionaires back in 2005 and when he met up with them all last year, him and only about 5 others still were.
Your strategy and plan needs to work whether the market goes up, goes down, or stays the same for the next 20 – 30 years. If not, eventually the market will turn and you will end up like most others and lose everything.
Have a read of the articles and let me know if you have any other thoughts or questions, cheers.

Graeme


Building a solid foundation in real estate.

With a large number of well known property investors in NZ going bankrupt, this may be a good time to take a look at your own property portfolio or investment strategies. Many of these investors were also promoters and charged thousands of dollars (at times tens of thousands) to mentor the unwary or naive beginning investor, and often charged for their investing seminars and related materials. If they were so successful and could teach others how to invest and some even tell investors which way the market was going to go (up or down and by how much!) by using various indicators, why have most of these so called experts gone bankrupt themselves - or very close to it? A few of them in my opinion were always out for themselves, in other words deliberately sold or promoted dodgy investments, or had strategies which were just never going to work. Even though a few of us warned other investors about several of these so called and self professed property gurus, they still had a lot of followers that went along with everything they said, as if they were some sort of Messiah or similar. They could do no wrong in their eyes and believed every word they said. Surely you would think with the amount they charged for their mentoring services, seminars, subscriptions, blogs and other products and materials, they would have huge sums of money to invest with and invest it wisely, i.e. with low risk strategies. You would think they would still be very well off today.

I believe it's because none of them had built a solid foundation to begin with. When you build a home, the most important part and the part that takes the longest to build, is the foundation. In property investing, one of the attributes that goes into building a good solid foundation is buying rental properties that the average family will want to rent, e.g. a 2, 3 or 4brm home, in a reasonable location and in tidy order.
Other not so obvious building blocks for your solid foundation include putting down a 20% deposit on each property you buy (as opposed to borrowing against equity gained on any other properties owned), having sufficient cash flow to cover all your expenses with each property, preferably a 20 year or less P & I loan (25year loan possibly if the cash flow is tight, but never 30 years), and buying below market value by knowing your market well. Following this you will build equity each year in your property portfolio (that is with a static or rising market - on a market where property prices drop over the year, it will depend on how much you pay off principal compared to the drop in property prices whether you build any equity or not).
If you use the interest only approach as so many investors still do, and the method usually taught by the promoters mentioned above amongst others, you are only building equity when the property market is rising. You lose equity when the property prices are going down. Out of all the hundreds and hundreds of investors that I’ve met, less than a handful has used the ‘interest only’ strategy well. Each of these investors have either sufficient cash flow from elsewhere (other property strategies or a business etc), a low debt to equity ratio, or they specialise in commercial type multi-unit properties often worth in the millions of dollars to purchase. For the average investor using I/O, I do not know of anyone trying to build a good solid property portfolio (apart from these few people) that I would say has a good, rock solid foundation. There may be a few people out there, but I have never met them!

This is what I would class as a solid foundation in which to build from: -
1) Using P & I loans –
(i) never borrow more than 80% of the purchase price (not the property value) when buying
(ii) take out a loan of 25 years and preferably less
(iii) buy the next investment property only when another 20% is saved (not from refinancing existing properties)
(iv) cash flow to cover all the outgoings - including rates and insurance.

By doing this, I believe by the time you have 8 – 10 properties, you will have a good sound foundation on which to build from. I would not borrow against any increased equity at any stage to buy further rental properties - even if they have doubled in value, or your borrowing is below 50% on any of the properties.

2) Using Interest only loans –
(i) never borrow more than 70% of the purchase price (not the property value) when buying
(ii) purchasing the next property only when another 30% is saved (not from refinancing existing rentals as mentioned above)
(iii) cash flow to cover all the outgoings - including rates and insurance.

I would also add that until you get to a level where your portfolio (using I/O) reaches 20 - 25 rental properties, a debt level of 60% or less (by paying off more debt when you are able to) and a positive cash flow after all expenses of a minimum of $5,000 per month, you haven’t got a good foundation. Anything less than this using I/O is in my opinion a time bomb waiting to go off, and any unforeseen circumstances that come along could wipe out everything you’ve worked for. It’s just way too risky, and not worth gambling everything on.

You may have heard the difference between good debt and bad debt and to a certain point I agree with what others say about this. It is very beneficial to use good debt (debt that somebody else pays you to own) to help you leverage your money while you are in the building stage of your property portfolio. However there comes a time when you will hopefully say to yourself – “this is a level I’m comfortable with, and now rather than buying any more properties, I will focus more on directing any excess savings into paying down debt on my rental properties at a faster rate than what I have been doing.” Paying all of your debt off, therefore being totally debt free is what the ultimate goal (in my opinion) should be.
In my property portfolio, I have 9 existing loans at the moment (out of 40 properties) with loans of less than $65,000 on each, one of them being a mortgage of only $38,000 on a property with a market value of approx $200,000.

Assumptions
If you have the assumption (even now!!) that property prices consistently go up in value over time, that very thought could cost you everything you want to achieve with your real estate investing (more so if you use interest only).

Here are a few other assumptions that have caught people out in the last few years.
1) I’m good at buying properties below market price - therefore I am a good investor
2) I am good investor, therefore I am also a good property trader
3) I am good at business and have made lots of money by running a successful business, therefore I will also be good at real estate investing
4) I am a good property investor, therefore I am also good at speculating with design and builds, buying sections and sub-dividing properties
5) That person is well known and speaks so smoothly and with confidence on stage, I will be able to learn a lot from him/her
6) The person speaking on stage is very enthusiastic about what they are selling. It must be amazing what they are selling, plus so many other people agree with what he’s saying - it has to be genuine
7) I would never buy outside Wellington, Auckland or Christchurch - the smaller towns just don’t have any capital gain{(i)if you rely on any capital gain, to me you are not an investor but more of a speculator, (ii) over the last 50 years or so in NZ, cities with 100,000 or more population have had an average % per annum growth rate within approx 1% compared to the other cities in NZ)}
This person has written a book on property investing, I will follow their plan and therefore will also be successful
9) This person knows exactly which locations will go up in value as opposed to other areas, I will therefore follow their advice on where to buy and when to sell
10) I’ve heard that tax liens are the way to go, there is so much money to be made in them, I’m going over to the U.S. to invest for myself
11) These people on this property chat forum have written well over 1,000 posts telling other investors how to do it, they must know what they’re talking about (for every one of these posters on property forums that does know something about investing, another 4 or 5 know very little about it, and spoil it for the new people wanting to learn)
12) Property is the best investment you can ever make, you will never lose money by investing in property

So these are some of the assumptions that people have made about property investing - more so in the last 10 years or so. When you assume anything like what is mentioned above, you stop thinking for yourself. When you stop thinking for yourself and follow others blindly, you are not taking responsibility and you also have an excuse to blame others if things go wrong for you, in other words – it’s not your fault. So take responsibility, don’t follow the crowd, think for yourself, and if something sounds too good to be true - 99% of the time it is.

For me, I’ve had two major threats to my property investment portfolio, and without a good solid foundation when these events happened, either one of them would have wiped me out as well.
The most recent (18 months ago) was a separation with my partner of 16 years which cost me a lot of money and is something I would not want to go through again!
The other threat or event that happened was about 6 years ago. It’s a long story which was written about in my updated book in 2008 (“NZ Real Estate Investors’ Secrets” - available through Good Returns), with me losing approx $1.5 million over the 12 months from the end of 2005 to the end of 2006. It all stemmed from me being in hospital with peritonitis (burst appendix) and coming out of hospital 10 days later on such a high with all the drugs, etc. I bought about 5 million dollars worth of property and cars over the following two months, breaking most of my own investing rules - and it nearly cost me everything. For a long time my cash flow was approx $70,000 a month negative. So going backwards by $70,000 each and every month, selling these properties and cars I had just bought at huge discounts, as well as selling around 20 properties from my existing rental portfolio (I had about 65 properties at the time) was the only way I could save it all. But without the solid foundation that I’d built up over the previous years, I would have been left bankrupt - like a lot of other investors have ended up today.

So in summary, take a look at your own property portfolio, or if you are just beginning - look at various potential threats or dangers and create a plan that is as safe as you can possibly make it. Build a solid foundation, there is no rush. Build it solid enough that it can withstand any potential threats you think could happen one day. A lot of the time we have assumptions, not realising they are just assumptions and are not based on any facts. Read books, talk to other successful people that also invest, but always think for yourself.
Have fun along the way and celebrate your successes, safe investing.

Graeme Fowler

[orion]

‘Tempted by a Booming Market’? by Graeme Fowler written in 2004.
A few days ago, a man walked into my office wanting to talk about investing in New Zealand Real Estate. Apparently, he had just visited one of the real estate companies in town, and they had suggested he come and talk to me for some investment advice. This is how the conversation went:
Investor: I was told you might be able to help me with some projections.
Graeme: Okay, what sort of projections are you after?
Investor: On real estate prices over the next five years.
Graeme: I’m not sure what you mean by projections, can you explain please?
Investor: Well, I have a group of investors that have some money to invest, and we want to buy some properties together as an investment. I need to be able to tell them how much we can make, and what sort of returns we are likely to get in five years from now. Can you help with some projections on prices?
Graeme: So, you mean you want me to tell you what prices will be in five years time, compared to what they are now?
Investor: Yes please, that is what I am after.
Graeme: I have no idea what prices will be in five years time, two years time, or even this time next year. I would only be guessing, as would anybody else you ask. In fact, this is one of the major reasons why people lose money investing in property; they go into it for the wrong reasons, hoping that the properties they buy always go up in value. Then when they don’t go up, or they drop in value, they get despondent and sell. I have written a book about real estate investment that explains about this. You would be better to read it before doing anything else, especially if you are investing money for other people. Would you like a copy to read?
Investor: No, I don’t want to read a book; I just want to invest some money in real estate because I’ve been told it’s a good investment.
Graeme: Well good luck, but I’m sorry, I cannot help you with what you’re after.
I was at first stunned by what this guy was wanting, but on reflection, realised there are probably many other investors just like him. They hear real estate values are going up, so they rush in to buy something without any knowledge of what they are doing. I don’t ever try to predict what is going to happen in the market, but if I were to guess what will happen, it would be that the market will start to change soon, especially when people like this are starting to become real estate investors.
I remember at one of the Hawkes Bay Property Investors’ Association meetings I attended back in early 2000, everyone at the meeting was fairly despondent about the real estate market. I think I was one of the only people that put my hand up at the meeting when they asked who was looking at buying more properties during that year. The majority of people were either holding what they had, or selling. It was recommended by the President at the time, plus a few elderly investors, that a cautious approach should be taken, and not to take on any more debt because there was so much pessimism with the market. They were saying that house prices were far too high, the market was at a peak and perhaps even to sell one or two properties if they had a larger portfolio. I said to my friend Richard who was sitting next to me at the time – ‘that’s it – I’m going to buy as much as I can this year!’ I ended up buying 28 properties that year and 32 the following year. The majority of people were pessimistic, and I was buying everything I could.

Having said that, when I buy any property, it must make sense to me at the time of purchasing, not only make sense if the market increases by some fictitious amount year after year. It seems with both real estate and shares, when the market is rising, everyone wants to get in, and when the market is falling, everyone is running away from it. If your favourite supermarket started to put all its prices up, you would walk away from it, just as you would buy more from them if they were having a big sale. Investing in real estate is no different, but people do the exact opposite to what they would do when buying everyday products.
If you are just beginning to invest in real estate, think carefully. Are you doing it simply because it seems like the popular thing to do and all your friends are doing it? Take a long term approach before you do anything, get some advice or opinions from people that have been successful, not in just up-markets, but over a long term. Also, use a mentor if you think it would help, and keep developing your own positive mindset and psychology.

[orion]

‘What’s the Property Market Doing, and Should it
Really Matter?’ by Graeme Fowler written in March 2005.
Perhaps the most common question I get asked as a property investor is ‘what do you think the market is going to do?’ I will usually answer with something like ‘I have no idea what will happen, and I really don’t care.’ A couple of months ago I was invited along to a free two hour seminar put on by one of the major banks on property investment. The guy that was speaking had one property himself which he was now selling as he thought it was a good time to sell. The rest of the time was spent going through a whole range of meaningless graphs, charts, facts and figures explaining to us all what he thought might happen to property prices over the next few years. Of course he really had no idea and admitted that many things could affect what he thought might possibly happen anyway. It’s extremely tiresome to me hearing about, or reading about peoples’ opinions in newspapers or magazine articles, about what they think property prices will do. The fact is, nobody really ever knows what will happen, and more importantly – why should it matter anyway?! It matters very little to me whether prices rise, fall or even stay the same for the next 20 years or more. By having investing rules that work whatever happens to property prices is one of the keys to successful investing.
P&I vs Interest Only
Most investors use the traditional ‘buy and hold’ as their main strategy which is fine.
There are also those investors that use buy and hold as one strategy, and also use one or a number of other methods including; – trading, renovating and reselling, lease-options, developing, or building. I use the ‘buy and hold’, ‘renovations’, and the ‘trading’ strategies. Now, if you have an investor that just uses the ‘buy and hold’ strategy and has been investing for a few years, should it matter if the market price of their properties goes up or down in value from time to time over the next 20 - 40 years? The answer of course is no. But what makes it matter to them is when they decide to use ‘interest only’ loans, as opposed to P & I loans. Now they are forever hoping, maybe even praying – for ever increasing prices.
New investors will often ask ‘is now a good time to buy, or do you think I should wait until the market goes down a bit (or crashes)?’ One of the biggest problems I see with property investment is that people go into it for the wrong reasons, or with their own assumptions – and not even knowing they are assumptions.
The biggest assumption of all is that ‘property will always go up in value’. The majority of investors rely on future capital gains before they make any real money. Starting with the assumption that prices will forever keep going up, many people decide to finance their properties using an interest only loan as opposed to a P & I loan. With an interest only loan, you do get a few dollars extra a week in cash flow, but the property never gets paid off unless you pay for it from somewhere else. The investor relies on their rental property going up in value perpetually, thereby gaining more equity in the property, which they often take out by refinancing, and then buying further properties. This now takes them back up to a similar debt/equity ratio as when they first bought the property. This can go on as long as they continue to invest in property, forever refinancing when prices go up and always being heavily geared. To me, this is such a dangerous strategy and one I’m personally heavily against. If they truly are a ‘buy and hold’ investor for the long term, I will often ask these investors if they think there is any possibility of prices dropping by 15 - 20% anytime over the next 30 or so years? Of course the answer is that it is possible and it’s already happened in many other countries in the past including the U.S. and Japan. So, if there is always this possibility, why would they risk all they own on it not happening? All that would need to happen is that you are geared at 80 - 90% over your entire property portfolio say in 10 or 15 years time, and the property market then suddenly slumps 20% within a year. This could happen for any number of reasons including interest rate rises, a change in government policy, war, world-wide share market crash, an outbreak of foot and mouth disease in NZ, baby boomers retiring etc, etc. Now, because of the reduced equity in your property portfolio, your bank manager wants you to come up with at least $200,000 by the end of the month, as he considers you are too highly geared and too much of a risk for their bank. You can’t even sell these properties now for what the mortgage is on them, so you’re forced into bankruptcy unless you can come up with the necessary cash to reduce your debt/equity exposure.
Property investment can be so simple, and I think because it is so simple, most people want to complicate it, and end up losing money long term. With investment in property, business or shares, the majority of investors lose long term. Any investor can make money, or think they are doing well in a rising market, but will their rules and strategies work equally as well in a down-trending market? Most of the time, the answer is no.

Are You Creating Wealth, or Protecting it?
I think before getting into property investment at all, people need to ask themselves the question; – do I want to do this for ‘wealth creation’, or do I want to do it for ‘wealth retention?’
The ‘buy and hold’ strategy is used mainly for ‘wealth retention’ and I think where a lot of investors go wrong is they try to use it for their ‘wealth creation’ vehicle. A business owner or an employee with a reasonable income could use his/her savings for deposits on rental properties, even if it’s just one or two a year over the next 10 years. The tenants end up paying off the loans on these properties over the following 20 - 25 years (N.B. the investor of course needs as one of his/her rules a gross yield that is acceptable before purchasing any rental property). This also acts as very slow ‘wealth creation’, as the tenants eventually pay the loans off (on P & I) in full, but it’s actually a ‘wealth retention’ method. A trader, renovator or developer has the intention of making quick cash profits which is a ‘wealth creation’ method, or strategy. They may then use the income from this to park into property, which then turns it into ‘wealth retention’. Where the thinking goes wrong with many investors is they try to use a ‘buy and hold’ (wealth retention) strategy with their properties as a ‘wealth creation’ vehicle. Often these property investors will talk about wanting a small positive cash flow from a huge number of properties in order to replace their current income from a job, or to enable them to sell their business. They want to use a ‘wealth retention’ method for the purpose of ‘wealth creation.’ This one distinction if not fully understood, could well lead to the downfall of many property investors over the next ten to fifteen years.

Do You Have a Passion For Property?
From the nearly 20 years of experience I’ve had in real estate investing, I’ve noticed that the investors who have a passion for property investing will often use other strategies in real estate such as property trading, renovations, lease-options, writing books, doing seminars, or mentoring others, to help with their own ‘wealth creation.’ Therefore, these investors can have multiple streams of income from one solid base, which is property. And those investors that have property as more of an interest to them, rather than it being a passion to them, use property as a ‘wealth retention’ tool. The problem as mentioned is when many of these investors try to use the ‘buy and hold’ strategy as a ‘wealth creation’ vehicle (instead of ‘wealth retention’) to replace their income from a job or a business they don’t enjoy being at. I think a lot of this way of thinking has been created after people have read books like ‘RichDad PoorDad’ or ‘Cashflow Quadrant’, and then thinking they must be in the ‘ratrace’. They also want to be a ‘Business Owner’ or an ‘Investor’, not just an ‘Employee’ or a ‘Self Employed’. The point to realise is that the wealthiest people in the world today still go to work, even though they don’t have to – because they have a passion for what they do. They love their work, they don’t want to be doing anything else! And at the end of the day they are still an ‘Employee’ as well as a ‘Business Owner’ or ‘Investor’.

Summary
So, what are my answers to the previous questions – ‘what do you think the market is going to do?’ and ‘is now a good time to buy, or do you think I should wait until the market goes down?’ My answer is simple – ‘start asking better questions!’

[nnf7908]

Hi Greame,

thanks for your thoughts!

i was brought up in a family where there were no bad or good debts. the concept of any debt was to pay it all off as quick as possible. for that reason, i was struggling with myself when i set up my first mortgage to IO structure. I have read a few books in property investment field, books of R. Kiyosakii, D Trump, K O'Leary, M. Hill and etc

what i did like a lot in your comments is something none of these guys mentioned ever before:
"When I buy any property, I ASSUME the market will go down, so I have to make money still if that happens, i.e. my assumption is correct. If it doesn’t go down, or goes up then it’s a bonus nothing else"

O'leary did mention something similar saying that when he look into investment he did only care about cold hard cash coming to him every week and he did not give a damn about any potentiality of appreciation or capital growth.

However, Greame, i have recently watched a recorded speech of Chris Gray ( i think he is a big time investor in Aus). i liked his way of investment which is a bit similar to yours. He has also shared a lot of your points regarding building a strong foundation first.
And also, his video changed my well-setup-by-my-parents-mind of P+I structure. The main reason for that was INFLATION!
a lot of people are talking about benefits of IO from the tax aspects, which i never liked. I have always thought that i would rather pay a bit more to government than to banks. BUT inflation changed my mind. what do you think about it?

i would like to build my empire like you did with sound stainless foundation. however, with what i do, i can only afford to save up to 20 percent deposit per year, where i want more than that! i would like to buy at least 3 properties a year, and the only way as i could see(without changing my job, i am in real estate and i love it) is to LEVERAGE my existing portfolio. ( the first apartment i bought was a good deal - valuation came up to an extra 60k on top of my price i paid for it)
so this is the key reason i have decided to change to IO and so inject as much money towards second and third deposits.
in 20 years i do hope inflation will take care of it and so i could, say, sell 5 houses and so pay off/or almost pay off the rest of the mortgages, what is your view point on that? however, i do want to have at least 20/80 ratio of equity to borrowings while i am building my portfolio.

and finally, I am only 28yo now, and i think i could take a bit of more risk when it comes to Equity ratio, i.e. buy 10-15 properties with 20/80 ratio on IO structure til i turn say 40ish. stop after that, increase equity up to 40 %, and then follow your lead, what do you think? ps. while i am young i want to work and work hard!

Sorry, i did not introduce myself first. I am Ali, 28yo, came to NZ, Auckland 10 years ago from Kazakhstan, been living here since then,
love the country and people. Always had a passion in Real estate since i was a kid ( helping my parents with their small 4 units portfolio back in mid 90s)

to sum it all up:

1. Inflation vs P+I, i.e. not paying principle, but using it to save 20% deposit quicker.
2. higher risk while you re young, 20/80 on IO until 45ish, stop and start paying off equity.
3. finding and buying under valued properties, re-do, re-value, leverage
4. changing the job?
5. when to stop? what is the limit number? can you keep buying up to certain age, instead of the actual number of properties?
for instance, i will stop buying when i turn 50?


thanks for sharing your knowledge, Greame. People like you inspire me and make me think bigger and move forward !
sorry for asking you so many things....

[orion]

Hi Ali,

If you read the articles I sent through, as I mentioned there are very few people I have ever met that have successfully used I/O long term, only 3 or so that I know and they all had million dollar plus multi dwelling high yielding properties. If inflation was the answer to it, then why did all the others go bankrupt or close to it? Sure inflation may be 2 – 3% per year, but what happens over in say a 2 year period when the values drop 20%? If you are leveraged at 80% before that happens, you are now at 100%.
An example here is a property I bought in 2006, so 9 years ago for $160k. I put in 20% at the time so the mortgage was $128k. The property if I sold it now, after real estate agents fees I would probably end up with about that ($128k). If I was on I/O I would be leveraged at 100%, so the market has dropped here. To me that is great though as I have been able to buy a lot of properties this year for a lot higher yield than back in 2006 and the rents are the same if not a little bit higher. On that property I did a P & I loan of 12 years and the debt now is down to only $43,000 and will be paid off in 2018.

Trying to make things happen faster as most do will be your downfall if you stick to your strategy, almost guaranteed. It’s fine to have 80% gearing when you start out as you are, but you want to be reducing that as time goes by.

You would be best to look at what income you want from property after they are paid off and work backwards from that, not just say you will buy properties up until a certain age as there is nothing you are really working towards. I’m going to be doing a goal setting and planning article in the NZ Property Investor magazine sometime in the next few months which I think will help you greatly. It is really important.

One other quick thing, just because the valuation came up to $60k more than what you paid is fairly meaningless, you could go get another valuation and it may come in less than what you paid. They are not accurate at all, the way you know market value is to look at 100’s and 100’s of properties in a certain area and after that amount of time, you will get to know what they sell for etc, what is a good buy and what is not. Experienced real estate sales people will generally know far better what prices are than most valuers will.

[nnf7908]

thank you, noted

[glenrobertson91]

Hi Graeme
My name is Glen an I am 23 years old wanting to get into property investing. My situation is I am a builder, me an my partner own our own home together, we purchased it as a do-up/learning curve an it should be all done early next year. My idea is to trade properties an use the profits to buy rentals along the way. Just afew questions if you don't mind.

1- In Hamilton where we live it would take quite large amounts of capital to get a good rental property that is neutral/positive. In saying this would you suggest looking out of hamilton in a smaller town where it is easier to to find the ideal yield? An if so do you recommend any areas close to the waikato?
2- In hamilton the property types that are close to being cashflow + are not "great" properties as in terms of resale. What are your thoughts on this, as it is quite scarey being a young investor purchasing a property in an undesirable area?
3- Also how can I go about researching an area noting I am young an don't have spare money for the fancy online software that's out there. Moreover what should I be researching?
4- when analysing a certain property or deal what are the main areas that I should take into account to make the purchase an investment rather then hoping.

Any tips or ideas for me would be greatly appreciated thanks Graeme

Cheers