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This question was asked to 5 of us for the NZ Property Investors’ magazine for an article which is in this months magazine.
It was shortened down to about 400 words for the magazine, so here it is in full:-
With $60,000 in cash, there’s quite a lot you could do without too much risk.
However it does depend a lot though on your strategy, your plan, your own financial intelligence, and how risky you are as an investor.
Lots of people use risky strategies that will most likely cost them everything in the long run. They try to pick which area to invest in, in other words - what locations they think will go up in value. They invest with assumptions, hopes and wishful thinking, not with logic and common sense.
It doesn’t even come into my thinking as to what I think will happen with prices, as it has no relevance to me. It only has any relevance if you want, expect, or hope that prices will go up, i.e. strategies that rely on that happening for your plan to work.
I don’t ever know what’s going to happen, and neither does anybody else know. Also I don’t care if property prices go up, down or stay the same for the next 20 years. My strategy and plan will work in all markets.
Last year I bought 20 rentals effectively using no money and they were still cashflow positive on 20 year P & I mortgages. So with $60,000 cash there are safe options to use if you have the experience.
What I would do is look for properties that were suitable as rentals, with yields of 10% or so in locations such as Hawkes Bay, possibly Rotorua, Wainuiomata and maybe Feilding. I know you can get good quality, good location and easy to rent properties in Hawkes Bay with those yields, and I’m pretty sure with some looking around I could find them in those other areas as well. I would rule out Auckland, not because of the 30% deposit rule and the fact you could only buy something up to $300k there if you could still use a 20% deposit, but because the yields are way too low. It doesn’t make sense to buy there and the only reason people do accept such minimal yields, is they think that prices will keep going up. That may or may not happen and I never base investing decisions on what could be. To do so would be very risky, plus you would have to top up the mortgages as well.
Knowing Hawkes Bay so well, I would look for something I could buy below market value and either, add value to it, or rent as it is. For example, let’s say a property was worth $170k and I bought it for $150k. I would initially borrow $120k (80% of the purchase price). This would use half of the $60k cash ($150k - $120k = $30k). This property would easily rent for $300p.w. and the mortgage on a 20 year P & I loan would be about $180 a week. Rates, insurance and property management would be another $70 a week or so, leaving it cashflow positive by $50 a week (not including any maintenance).
So, you could use the other $30k to do the same and you would have 2 properties being paid off in full by the tenants in 20 years. You would have a cashflow of about $100 a week, which should more than cover any maintenance.
What I would do is look for another one asap and do the same. And, because I bought so well, I would look to refinance them as quickly as I could to give me back as much of the initial deposit as I could. As I said last year, I did this on 20 properties and because they were bought so well, I ended up not using any equity at all.
In this case though, let’s say the first property valued up to $170k. The bank after 3 – 6 months should allow you (or immediately after any renovations etc) to refinance your original loan, providing you get a registered valuation from a valuer that the bank has on their approved list. If it values to say $170k, the bank will let you borrow 80% of that - which is now $136,000. This would cost another $20 or so a week in mortgage payments, but you would still be cashflow positive. You have now used effectively only $14k of your original $60k. ($30k minus the $16k given back by refinancing: - $136k - $120k).
Using this with the same figures you could buy 4 properties (4 x $14k = $56k). You will now see by buying even better, or having the valuation work more in your favour (valuations can vary hugely!) you may need a lot less equity per property than even this. I would be looking to buy at 20% below what I know I could get them to value to, which would mean I’m not using any of the $60k cash at all, after they are refinanced. You need to allow some for maintenance though, so I think you could comfortably buy 10 properties this way (end result of $6k equity used per property) and be okay.
With the 20 properties I bought last year, so far the maintenance on these works out to be an average of about $1,000 a month total over the 20 properties.
To show how it would look using $6k equity each time, it would be something like this: -
Purchase price $145,000.
Initial deposit (20%) $29,000.
Revalue several months later to $174,000.
Bank will lend 80% of that which is $139k.
In effect, $6,000 equity used ($145k - $139k).
One important thing to me is if you do refinance like this, don’t ever refinance them again after that! Let them just sit there with all the mortgages reducing over time until all of them are paid off in full. A common mistake a lot of people make is refinancing their investment properties (and often their own home!) when the market goes up. They use the extra equity to buy more, sometimes refinancing several times and never bringing their debt to equity ratio down. This is a recipe for disaster which has already cost hundreds of investors in New Zealand everything they’ve worked for and built up, by thinking the market always goes up. It doesn’t
So in summary, let’s say I ended up buying the 10 rental properties using $6k equity for each, and they all had a market value of say $150k. That would be $1.5 million (10 x $150k properties) worth of property purchased using the initial $60k of equity. The tenants will have paid off all the mortgages after 20 years.
At that stage any upward movement in prices would have been a bonus - if you did want to sell any of the properties, otherwise you would have around $10k a month in rent after all expenses coming in from 10 freehold rental properties.
Another way to look at it is this - the original $60,000 cash has been used as leverage using other people’s money and other people’s time to create wealth for you. That’s something you wouldn’t have been able to do if you had to pay off all of the10 properties by yourself, using your own wages/income.
So, after all the mortgages have been paid off, you’d be getting your original $60,000 you invested back in rent every 6 months, and still have 10 properties!
It was shortened down to about 400 words for the magazine, so here it is in full:-
With $60,000 in cash, there’s quite a lot you could do without too much risk.
However it does depend a lot though on your strategy, your plan, your own financial intelligence, and how risky you are as an investor.
Lots of people use risky strategies that will most likely cost them everything in the long run. They try to pick which area to invest in, in other words - what locations they think will go up in value. They invest with assumptions, hopes and wishful thinking, not with logic and common sense.
It doesn’t even come into my thinking as to what I think will happen with prices, as it has no relevance to me. It only has any relevance if you want, expect, or hope that prices will go up, i.e. strategies that rely on that happening for your plan to work.
I don’t ever know what’s going to happen, and neither does anybody else know. Also I don’t care if property prices go up, down or stay the same for the next 20 years. My strategy and plan will work in all markets.
Last year I bought 20 rentals effectively using no money and they were still cashflow positive on 20 year P & I mortgages. So with $60,000 cash there are safe options to use if you have the experience.
What I would do is look for properties that were suitable as rentals, with yields of 10% or so in locations such as Hawkes Bay, possibly Rotorua, Wainuiomata and maybe Feilding. I know you can get good quality, good location and easy to rent properties in Hawkes Bay with those yields, and I’m pretty sure with some looking around I could find them in those other areas as well. I would rule out Auckland, not because of the 30% deposit rule and the fact you could only buy something up to $300k there if you could still use a 20% deposit, but because the yields are way too low. It doesn’t make sense to buy there and the only reason people do accept such minimal yields, is they think that prices will keep going up. That may or may not happen and I never base investing decisions on what could be. To do so would be very risky, plus you would have to top up the mortgages as well.
Knowing Hawkes Bay so well, I would look for something I could buy below market value and either, add value to it, or rent as it is. For example, let’s say a property was worth $170k and I bought it for $150k. I would initially borrow $120k (80% of the purchase price). This would use half of the $60k cash ($150k - $120k = $30k). This property would easily rent for $300p.w. and the mortgage on a 20 year P & I loan would be about $180 a week. Rates, insurance and property management would be another $70 a week or so, leaving it cashflow positive by $50 a week (not including any maintenance).
So, you could use the other $30k to do the same and you would have 2 properties being paid off in full by the tenants in 20 years. You would have a cashflow of about $100 a week, which should more than cover any maintenance.
What I would do is look for another one asap and do the same. And, because I bought so well, I would look to refinance them as quickly as I could to give me back as much of the initial deposit as I could. As I said last year, I did this on 20 properties and because they were bought so well, I ended up not using any equity at all.
In this case though, let’s say the first property valued up to $170k. The bank after 3 – 6 months should allow you (or immediately after any renovations etc) to refinance your original loan, providing you get a registered valuation from a valuer that the bank has on their approved list. If it values to say $170k, the bank will let you borrow 80% of that - which is now $136,000. This would cost another $20 or so a week in mortgage payments, but you would still be cashflow positive. You have now used effectively only $14k of your original $60k. ($30k minus the $16k given back by refinancing: - $136k - $120k).
Using this with the same figures you could buy 4 properties (4 x $14k = $56k). You will now see by buying even better, or having the valuation work more in your favour (valuations can vary hugely!) you may need a lot less equity per property than even this. I would be looking to buy at 20% below what I know I could get them to value to, which would mean I’m not using any of the $60k cash at all, after they are refinanced. You need to allow some for maintenance though, so I think you could comfortably buy 10 properties this way (end result of $6k equity used per property) and be okay.
With the 20 properties I bought last year, so far the maintenance on these works out to be an average of about $1,000 a month total over the 20 properties.
To show how it would look using $6k equity each time, it would be something like this: -
Purchase price $145,000.
Initial deposit (20%) $29,000.
Revalue several months later to $174,000.
Bank will lend 80% of that which is $139k.
In effect, $6,000 equity used ($145k - $139k).
One important thing to me is if you do refinance like this, don’t ever refinance them again after that! Let them just sit there with all the mortgages reducing over time until all of them are paid off in full. A common mistake a lot of people make is refinancing their investment properties (and often their own home!) when the market goes up. They use the extra equity to buy more, sometimes refinancing several times and never bringing their debt to equity ratio down. This is a recipe for disaster which has already cost hundreds of investors in New Zealand everything they’ve worked for and built up, by thinking the market always goes up. It doesn’t
So in summary, let’s say I ended up buying the 10 rental properties using $6k equity for each, and they all had a market value of say $150k. That would be $1.5 million (10 x $150k properties) worth of property purchased using the initial $60k of equity. The tenants will have paid off all the mortgages after 20 years.
At that stage any upward movement in prices would have been a bonus - if you did want to sell any of the properties, otherwise you would have around $10k a month in rent after all expenses coming in from 10 freehold rental properties.
Another way to look at it is this - the original $60,000 cash has been used as leverage using other people’s money and other people’s time to create wealth for you. That’s something you wouldn’t have been able to do if you had to pay off all of the10 properties by yourself, using your own wages/income.
So, after all the mortgages have been paid off, you’d be getting your original $60,000 you invested back in rent every 6 months, and still have 10 properties!
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