The Worst Wealth Creation Strategy

[Eugene]

Well said orion.
And when interest rates increase at the same time the pain is that much greater

[rocket]

I am not a veteran investor like Orion but have something to share. I am 34yr, came to NZ 5 yrs ago with $2000 in pocket,a young family & a good professional degree. I never knew that things like property talk, investor associations etc exist. I just set out with my own ideology & have created $5.2 M or more worth of asset.
For me Akl was the best place to start. I was very late for the Akl party & for some a bit stupid as my first IP was a villa in Akl central ( I am not an Asian but probably had similar ideology for property). But I stuck to my own basic principles & bought this property at GV(very rare for Akl central).This property has gone up $400k in 6months. I bought another 2 in AKl (developments) & can certainly see a massive CG. All these properties are negatively geared.(5% return)
After this I started reading property talk & changed my approach. Bought 2 in Waikato ( CF neutral, 8% gross yield).
I have very little debt on PPOR & have a debt free holiday bach ( never compromise on quality of living).

I am planning to now follow Orions strategy & buy another few in the next 6months.

Basic idea is to have a mix of every thing ( at least something will work at all times), all my investments are on I&P, 30% equity & all the properties are free hold houses where I can live myself ( good quality).

I am no body to advise as I have very little experience but would like to suggest that I & P is the best principle & keep a portfolio of variety. A good profession or job is a good safety net & so is a great wife/partner. PLUS never compromise on enjoying life to the fullest

[dubz]

Yes, very true Dean.

Gary has got in at a time with prices going up and also using someone's else's money, so has been at the right place at the right time. Because of this, he thinks he knows what he is doing and is clever or smart, but he really isn't at all.
Once things turn around and Aucklanders wake up to the stupidity of the prices people are paying, the market will no doubt turn around and he will get a wake up call. No amount of warning him, or anything you say will make him think otherwise because at the moment he thinks he is 10 foot tall and bulletproof. Have seen it so many times with people just like him, no point in reading any of his posts it's all just a waste of time.
At least Dean, you've been through it before and know what can happen in a very short amount of time, with very little downward movement in prices.

Everyone "knows" there's a risk of things turning pear shaped. It takes being burnt and dealing with the consequences to REALLY understand how badly things could end up. I think it's possible to be aggressive in investing without being reckless.

[Wayne]

Being young I was convinced IO was the way to go by the many so called "experts" out there - "Live off the cash-flow and use it to pay down debt"

The problem I had, and most people have I would imagine, is that you have to be extremely disciplined to use all the extra cash-flow to pay down the debt.

This was my point earlier - if you are a money disciplined IO is fine.
If you aren't then P&I forces you to 'save'.

[Wayne]

At the right time of the market, in Auckland, around 2010-12 the best strategy I have seen and been partially part off, is:
1) stretch yourself, take risks, and buy as many as you can all in one month/year if you can

Unfortunately I bought too slow.

Because you knew what would happen over the next 3-5 years?
Hindsight is a wonderful thing.

What is happening now is that people are looking back 3-5 yrs and figuring that the same will happen over the next 3-5 yrs.
There will be tears!

[elguapo]

Because you knew what would happen over the next 3-5 years?
Hindsight is a wonderful thing.

What is happening now is that people are looking back 3-5 yrs and figuring that the same will happen over the next 3-5 yrs.
There will be tears!

I knew a lot of people like Gary in Ireland in 2007, people who had mistaken their good luck for skill.

(this does not mean Auckland 2015 is Ireland 2007 BTW, I make no prediction as to future direction)

[elguapo]

Everyone "knows" there's a risk of things turning pear shaped. It takes being burnt and dealing with the consequences to REALLY understand how badly things could end up. I think it's possible to be aggressive in investing without being reckless.

Yes, aggressive does not mean reckless. Many people, however, are aggressive without understanding, or underplaying, the risks. Quite often they are aggressive without even understanding they are being aggressive, confirmation bias is a serious thing when a property market is running hot.

[genius]

As much as I like both Gary's and Graeme's strategies (one relies on capital growth and the other on cashflow which is possibly safer), Graeme's strategy cannot be implemented in Auckland due to terrible yields here.
Personally, I wouldn't call any strategy the "worst" if it's making money (capital gains or cashflow).
My own strategy has always been buying cash flow neutral properties in Auckland, put them on I/O (for at least 5 years), wait for capital gains and rental growth and then let any excess rental income pay off P&I.

[marklowes]

As much as I like both Gary's and Graeme's strategies (one relies on capital growth and the other on cashflow which is possibly safer), Graeme's strategy cannot be implemented in Auckland due to terrible yields here.
Personally, I wouldn't call any strategy the "worst" if it's making money (capital gains or cashflow).
My own strategy has always been buying cash flow neutral properties in Auckland, put them on I/O (for at least 5 years), wait for capital gains and rental growth and then let any excess rental income pay off P&I.

So you're buying in Auckland at present using this strategy? And are confident prices in Auckland will be higher in 5 years time than they are now? Based on Benjamin Graham's security analysis (Warren Buffets favourite book ever on investing) your strategy is not investing but is speculation, which over the long run (not 1 or 2 decades, but longer..) tends to result in zero returns as periods of extreme growth are cancelled out by periods of extreme retraction. Benjamin Graham discusses this in depth and talks about 'intelligent speculation' which is an attempt to use anaylsis to essentially predict the future. He concludes that no degree of analysis in 'intelligent speculation' can change the outcome of a sum zero return over the long run when speculating.

His book details the 1920s boom and 1930s great depression that follows. A lot of what he explains is freakishly familiar to what is happening in Auckland right now even though his book was written 60+ years ago.

[elguapo]

As much as I like both Gary's and Graeme's strategies (one relies on capital growth and the other on cashflow which is possibly safer), Graeme's strategy cannot be implemented in Auckland due to terrible yields here.
Personally, I wouldn't call any strategy the "worst" if it's making money (capital gains or cashflow).
My own strategy has always been buying cash flow neutral properties in Auckland, put them on I/O (for at least 5 years), wait for capital gains and rental growth and then let any excess rental income pay off P&I.

Personally I believe the only workable strategy in Auckland is to wait, and focus on debt reduction. Being in a strong cash position when a market dives is key IMO.

[genius]

So you're buying in Auckland at present using this strategy? And are confident prices in Auckland will be higher in 5 years time than they are now? Based on Benjamin Graham's security analysis (Warren Buffets favourite book ever on investing) your strategy is not investing but is speculation, which over the long run (not 1 or 2 decades, but longer..) tends to result in zero returns as periods of extreme growth are cancelled out by periods of extreme retraction. Benjamin Graham discusses this in depth and talks about 'intelligent speculation' which is an attempt to use anaylsis to essentially predict the future. He concludes that no degree of analysis in 'intelligent speculation' can change the outcome of a sum zero return over the long run when speculating.

His book details the 1920s boom and 1930s great depression that follows. A lot of what he explains is freakishly familiar to what is happening in Auckland right now even though his book was written 60+ years ago.

I am very confident that in 5 or 10 or 20 years time, Auckland prices will be higher!
My strategy is not speculation at all - house prices don't have to increase for my strategy to work.
I expect inflation wherever I live all my life. This means rents will go up due to inflation which means my rental income will increase. I will then use this to pay off my P&I.

[orion]

Well said orion.
And when interest rates increase at the same time the pain is that much greater

Yes exactly. Also any changes in policy or law can effect things.

[orion]

I am not a veteran investor like Orion but have something to share. I am 34yr, came to NZ 5 yrs ago with $2000 in pocket,a young family & a good professional degree. I never knew that things like property talk, investor associations etc exist. I just set out with my own ideology & have created $5.2 M or more worth of asset.
For me Akl was the best place to start. I was very late for the Akl party & for some a bit stupid as my first IP was a villa in Akl central ( I am not an Asian but probably had similar ideology for property). But I stuck to my own basic principles & bought this property at GV(very rare for Akl central).This property has gone up $400k in 6months. I bought another 2 in AKl (developments) & can certainly see a massive CG. All these properties are negatively geared.(5% return)
After this I started reading property talk & changed my approach. Bought 2 in Waikato ( CF neutral, 8% gross yield).
I have very little debt on PPOR & have a debt free holiday bach ( never compromise on quality of living).

I am planning to now follow Orions strategy & buy another few in the next 6months.

Basic idea is to have a mix of every thing ( at least something will work at all times), all my investments are on I&P, 30% equity & all the properties are free hold houses where I can live myself ( good quality).

I am no body to advise as I have very little experience but would like to suggest that I & P is the best principle & keep a portfolio of variety. A good profession or job is a good safety net & so is a great wife/partner. PLUS never compromise on enjoying life to the fullest

Well done rocket, great comments.

[orion]

This was my point earlier - if you are a money disciplined IO is fine.
If you aren't then P&I forces you to 'save'.

I think I'm one of the most disciplined people you would find when it comes to money, money habits, and finances.
However using P & I is the only way I would go, just so simple and logical and you're building equity each week without having to take money from somewhere else every now and then and reduce a loan. I can't see the sense in your reasoning.

[orion]

Because you knew what would happen over the next 3-5 years?
Hindsight is a wonderful thing.

What is happening now is that people are looking back 3-5 yrs and figuring that the same will happen over the next 3-5 yrs.
There will be tears!

Yes but it's probably a bit like being high on drugs for them Wayne, they don't see what's actually happening, they are caught up in a fantasy world of illusion.