Article for the NZ Property Investor Magazine I did 2- 3 years ago.

[donthatetheplayer]

Striver read this: http://tonyalexander.co.nz/wp-conten...nuary-2014.pdf

[orion]

Orion I have been reading your article and posts with interest. (As well as the very informative replies and conversations). It is obvious that merely buying property for investing is not going to work - far too slow. You have to first earn money by trading and then investment is the end result when you sit back with a passive income from the fruits of your profits.

I recently (April 2013) entered the property market by buying a rental property in South Auckland. I was incredibly lucky. I got it cheap and have rented it out for a 7.78% gross return. Nothing had to done to the house and its a huge section.

Now I have no money to go the way you have suggested. My property has gone up in value. I would like to delve into trade but not with the property I have on hand, I would never get an equivalent deal again.

I am also scared about losing money and hence jeapardising the property I have. Have you done an article on trading? Any advice?

Yes, unless you have a very high paying job, or a good cash-flow business then as you say it would be far too slow for most people. Personally the 7.78% yield one you bought would have been too low for me, however it may not be that easy to get better yields than that where you live?

Trading and doing renos was the way I did it but it’s not for everyone and works better in certain markets than others.
I don’t know what type of career you are in, but you may be able to think of something where you can generate extra money from doing that possibly.

If you are very passionate about property, you may be able to find properties for other investors and be paid a finders’ fee, or do some joint deals (trades/renos etc) with a friend/family member/painter/builder etc who has more available equity and you can profit share on each deal.

It’s really about being creative with what and who you know, what skills you have and can use, to earn some extra cash.
We are all different and enjoy doing different things, so it’s something you would have to have a good think about as to what suits you in generating extra cash to buy more rentals.

[Striver14]

In 3-4 years rent rises will make the property cashflow positive. Over that time I will have had to put in an additional $15k or so. On top of the $500k purchase price $15k is not much in the scheme of things. I can handle the weekly top ups no sweat. .. from 2017 onwards I'll have a property that will pay itself off over the next 25 years. If the value of the property goes down it won't actually make any difference to me. I'll only get burned if rents go down (so yes there is a risk). ..

donthatetheplayer - My circumstances are different to yours. I didnt have that much capital to start with, but here's the thing - my total mortgage payments are around $410 per fortnight and my rent, less property management fees, around 640 per fortnight, so I have ample cushion for any rate increases. I am getting a passive income right now. Also since I bought the property cheaply - probably the last of the cheap properties methinks, the value I think has gone up and even if median values fall mine wont as it is well below the median.

According to Wikipedia:
"A negative gearing strategy makes a profit under the following circumstances:
1. If the asset rises in value so that the capital gain is more than the sum of the ongoing losses over the life of the investment; or
2. If the income stream rises to become greater than the cost of interest (i.e. the investment becomes positively geared); or
3. If the interest cost falls due to lower interest rates or paying down the principal of the loan (again, making the investment positively geared)."

1- Is likely to be negative in the short term
2 - Wont be so for some time to come and
3- Interest rates are set to rise rather than fall

So it doesnt make sense to me to buy investment property in Auckland right now.

However there maybe other places where there are properties with better returns.

[Striver14]

..Personally the 7.78% yield one you bought would have been too low for me, however it may not be that easy to get better yields than that where you live?

Trading and doing renos was the way I did it but it’s not for everyone and works better in certain markets than others.
I don’t know what type of career you are in, but you may be able to think of something where you can generate extra money from doing that possibly.

Hi Thanks for your advice. I only just saw your post. It is impossible to get a 7.78% yield anywhere in Auckland today. I've searched and the very best is around 6% and those are few and far between. According to Barfoot the average gross yield in December in Auckland was 3.74% down from 4% in May 2013.

My job is not high paying and I can only do running around on weekends unless I quit my job, but I am getting passionate about property now that I own one for myself.

[donthatetheplayer]

I wrote a big reply and accidentally deleted it.. In short - good on you Striver. I have learnt that all experts are wrong sometimes. You have to do your own research, make your own judgements and choose the investment strategy that feels right to you.

[Striver14]

I wrote a big reply and accidentally deleted it.. In short - good on you Striver. I have learnt that all experts are wrong sometimes. You have to do your own research, make your own judgements and choose the investment strategy that feels right to you.

Thanks for that. For the moment I will just be looking observing and reading. I'm happy with what I've got and will only try for something more if and when the conditions are right and if some friend or relative comes in with me as I will not have enough capital to be comfortable even a year down the road.

[Davo36]

Striver, have you joined the APIA? you might benefit from going to a few of their meetings. Would be good to talk to others, see what they are doing, how they see the market etc.

[Striver14]

Striver, have you joined the APIA? ...

No I havent. Thanks for that tip. I'm having a look at their site now. Will ring them. Many thanks

[Pegasus]

HI Striver
You sound like you have a good head on your shoulders to me. We are also not into neg gearing. We have been traders for about 8 yrs and done well out of it. We bought our rentals a few years back in the low point and managed to find some 2 on one site with a bit of reno, all at 10% returns. We would not buy any buy and holds right now at such low yields - we will look at buying more in the next recession when no one else is buying.
One thing you can do right now, as we are is try to create a better yeild by subdividing and adding value, we are creating one right now that will be a good return - over 10% by relocating a house to a site which already has a minor dwelling. To be creative in this market is the way to go if you have the time and inclination for it. Trading is a good business if you have the skill for it - like any other business you need to be suited to it. Also it put us in a good position to find great deals for buy and holds as we had good contacts with real estate agents and are looking all the time.

Have you thought about looking at the property finders - I have not used them but they may get a good return property for you easier than looking yourself.

I think you need to get a clear goal and figure out how best to make that happen - for us we did not want a lot of property but wanted a few houses with mortgages paid well down so that we have a good passive income even when interest rates go back up again. So we needed to find the good returns but also pay them down with the trading otherwise it would take forever to get anywhere. Depends a lot on your other income and situation and skills.

Perhaps you need to speak with some traders or others in the field and get more info to figure out some options. Sounds like you have made a good start with your house you mentioned.

[Striver14]

Hi Pegasus. thanks for your reply. Its funny that you mentioned subdividing. The property I bought has a huge section, over 1200 sq m with a 3 bedroom house in the middle. I can build 2 3-brm houses on either side. The thing is subdivision is pretty costly, I found out the houses can be built without subdividing if all I want is to get the rent from them. This would probably raise the value of the property also? I looked at kitset homes, they come for about 65 - 70 K and I could probably get a finished house for about 125 K. The rents are around 350 pw in that area, so the gross yield would be about 14.5%. Trouble is I've got pretty good tenants in my house right now. I wouldnt want to loose them which would probably happen if I started building. Also there is the question of financing the construction. So perhaps for me it maybe a thing to consider some years down the track.
Do you agree that this is not a good time to be trading? And that the best time is at the height of a recession when values are low and about to climb back on again?

[Pegasus]

HI Striver
I believe you can trade in any market if you have the necessary skills to trade - I don't think its for everybody. Its about buying below value at the time or being able to add value and then selling at market value which gives you your profit. In the recession we found there is less competition when buying but less buyers when selling and selling can take a little longer - may have to use an agent to sell it. Right now, as in the last high times in the market we find we need good agent contacts who will call us maybe before a good property is on trademe, or we have to go quickly and be ready to make a quick decision - writing up the deal on the spot to secure it. Benefit is you can the on-sell much easier in this market and we have found we can sell privately again now as plenty of buyers. With trading you are not looking at capital gain so its about what you can sell it for now.

We got caught in the last recession being in the middle of a longer project when prices went down so we have learnt from that. We feel we have a few more good years to do subdivisions etc now but as it gets closer to the next recession I would only do quick trades as that is the danger time- when prices go down and you can find its worth less than you paid for it.

If you business is trading property then it needs to be able to work for you every year, more than if its a hobby or casual thing so you have to make it work rather than think there is only a certain time it can be done. We went from easy do-ups to bigger do-ups to small subdivisions. We have used the profits to pay down our rentals so that in the recession we do not have to trade if we don't want to but can live off the passive income.

I think your section has big potential. I would look at whether I could get funding to add the new houses first from the equity of the house. For that area relocatable second hand houses may be your cheapest option - we are doing our first of these right now as I mentioned - family house for $60k resited. If you really can't find the cash to do this, if it were me I would get the consent to build or look to resell it as a development site. Not sure what you paid for it but a friend of ours in Clendon got resourse consent to add 4 more houses on his similar sized site and then got offered a substantial lot more than he paid for it from a developer. There could be a good profit in your site and if so you then have to think - do I take that profit now and keep going forward to my goal or wait for the capital gain over a much longer period of time.

Again that depends on your goals. For us the quickest way to become more wealthy was to trade and keep increasing our funds with each profit. When this got high enough to do two trades at once we did that. We bought our first rentals in the recession as mentioned, and renovated them to increase the equity and then pulled out the equity to fund further rentals. That way we could keep using our first funds to keep trading. If we bought rental buy and holds too quickly we would not have had the funds to keep trading and it is the trading that has brought in the big $ to pay down the rentals and give the all important passive income. As the passive income increass that is replacing our need to work at all.

If you had a good job/career that suited you better obviously you would not want to be a trader. So it depends on your goals. Its most important to look at where you want to be ie how much passive income you want, or what you want and why and by what age. Then work backwards from there as to when you need to take action to make that happen. I have found a lot more is possible than you may think when you set a goal and put your mind to it. Without setting a goal you may find that its easy to go with the status quo and not a lot will change in your lifestyle. Trading does involve risk but it is calculated risk if done well it is a profitable business that can give much more back than a regular job.

Buying a rental property or two and seeing them rise in capital gain and get small profits from the rents is a great thing for sure. There is a limit to how far that will take you in creating wealth. We chose to trade first rather than hold because we could then make a far larger amount of profit per year than waiting for time to pass for capital gain. We have had good capital gain on the rentals we bought in the recession but without the trading to pay them down we would not be in such a good position whereby we do not have to work anymore and the passive income covers our expenses. As I said if you have a good paid job or other income - that could do instead of trading.

It sounds to me that you have a good feel for things as you are thinking carefully about costs and the results - that sort of analysing ability will serve you well in property. tenants are more flexible than you think. We have just finished another property where we had 2 lots of tenants agree to rent it on the basis that we were subidividing land off from each of their properties and there could be a house built there. They accepted it without issues. Otherwise you could lower the rent a little during construction or work with them in some way. Theres always a way around it - if the profit is large enough a small drop in rent will not affect the big picture.

Good traders need to be willing to take big risks boldly and act fast but at the same time be very cautious in their calculations and conservative at projecting profits.

[elguapo]

HI Striver
I believe you can trade in any market if you have the necessary skills to trade - I don't think its for everybody. Its about buying below value at the time or being able to add value and then selling at market value which gives you your profit.

How does this work in a falling market?

[Striver14]

Hi Pegasus, Thanks for your reply. Your analysis about trading is about the best I've seen. Makes perfect sense to me. Also your suggestion about lowering the rent as an incentive for the tenants to stay - absolutely brilliant, something I never thought about. I guess I could get resource consent for the two more houses and get a handsome profit from my property but then I would have to look around for another one. I dont think I would get such a good deal again. The price was unbelievably low. I really dont know why the owner sold. He must be kicking himself. The agent was also brilliant - honest and I was very lucky. There was another offer on the house and mine was higher by just 2 K. After 12 years of renting this is my first property. Thats why I guess I'm so reluctant about the idea of selling. I'm still renting and my landlord doesnt know I'm a landlord myself . Also when I bought the house I told the tenants, who had just moved in, that I was keeping one section for myself to do gardening on. I told them they could still use the section for themselves and their kids to play in but essentially I have the right to go there and garden anytime I wish, which I do every weekend and I'm off to do so now. Your suggestion about goals is also great. I will have to give it a think, I am a bit confused about where to go and how at the moment. I dont have a high paying job, it would be no sweat if I quit, except then how would I get a mortgage.

[Pegasus]

Hi Elguapo
I can only speak from experience. We did well trading 2005/06 and 07. In 2008 we hit the rocks becos we bought a longer project (subdivision) which added up when we bought it but the prices fell by the time we were ready to sell so we took a hit. So as I said I would be careful to trade on longer projects at the next recession. However we had very good years trading again in 2009/10 and so on thru to now. We got well priced deals and there were buyers if less than now but we had some of our best deals. My experience was there was a big drop quickly in our area then it stayed much the same from 2009 onwards until it rose again more recently so that whole period was fine for trading. This time around tho we will be cautious when coming towards the end of the boom and have our passive income in place to cover us if needbe in that time as dont want to get burnt again unnecessarily. You have to get the sales stats each month, know the houses in your area and watch what they sell for - dont just trust valuers or agents, you need to be your own expert in what sells for what price and how it changes.

Striver - we were very similar to you- bought our first place by scraping together what we could and we stayed renting ourselves in a very tiny flat for the first few years trading. If you can live the low cost simple life while doing this you can get ahead quicker.
Have you done much reading - Graeme Fowlers book is good, Olly Newlands books are good plus fun to read and we benefited from John Kehoe's 'Mind power' which helped us visualise and make our goals a reality.

Perhaps you are making the mistake of thinking you are lucky to find a good deal - is it luck or skill, who knows maybe a bit of both. But most of the experts say ' a deal of a lifetime comes around about once a week' for those who are looking for them. You need to expand your idea of what is possible - we have done this quite slowly but now expect to find great deals. There have always been people making a lot of money from property so there have to be plenty of deals. As you get more experience you will see lots of possibilities most likely. My feeling is that if you have found a good deal as your first and you know what you are looking for you have the skills to do it again.
Yes to get a good feel for what you really want for your goals would be the first step and try to believe that more is possible than you can see right now. Happy to discuss in more detail if I can help with any more ideas you can Private message me if you want to, best of luck

cheers
Pegasus

[Striver14]

Hi Pegasus, thanks for your reply. I like that - 'a deal of a lifetime comes around about once a week'. Good deals keep coming, but great deals like mine are infrequent today. They were not a year or so ago, but not today. I keep looking and just a couple of weeks ago I saw a nice property with a large section, nice house recently done up going for 50 K more than I bought mine. Still a great deal I thought. I rang the agent and found it had an offer with a back up one on it, so properties are going fast now a days. If I am to buy I have to be ready with the money. That would have to be my first step.
You are right it was not purely luck but luck had a good deal to do with it. I had been looking for a couple of months when I saw this property in Dec 2012 along with another one. I went for the auction on the other property. Some of the properties had vigorous bidding, specially the higher valued ones, but for this one I was the only bidder. I bid a ridiculously low figure and thought I had won the bid. It was eventually sold for 50 k more than what I had bid. I then realised my property was a pretty good deal, but I was told by experts who had bought their properties in a buyers market that what you do is make a low offer and then negotiate upwards, which is what I did in Jan 2013. The agent warned me that I wouldnt get it at that price. I upped my price a bit and then was told there was another offer on the property. I was told by the experts that other properties would come along and not to get carried away but I realised that if I were to get that property I would have to do something drastic so I bid 16 K more than my last offer and got it by 2K. In hindsight even if I had bid 26 K more it would still have been worth it and getting something by the skin of my teeth involved a great deal of luck.
Your advice to Elguapo is pretty good. From your experience it seems timing is important and long term projects specially in a buyers market should be avoided.
Yes I'd like to private message you. How do you do that?