Articles - Graeme Fowler

[orion]

The link doesn't work Perry

[ivanp]

Chlorination woes: Hastings landlord forced to replace hot water cylinders in 50 of his 65 homes

Wonder if the link works this time...

Cheers
Ivan

[Learning]

The council adding chlorine to the water caused the problem, but, despite that, it's not the council's fault.

Of course.

No such thing as cause and effect.

The chlorine hasn't created most of the problems it's uncovered preexisting problems. The holes were already there before the chlorine was added... they were just clogged with limescale.

Next the Council will help kids at parties by removing the knots from their balloons.

[Perry]

Those cylinders may've last many more years had the Council not added chlorine to the water. It was the chlorine added by the Council that precipitated the failures.

Sorry, I don't accept liability for that dent I made in your car. There were scratches in the bumper, already.

[Learning]

Sorry, I don't accept liability for that dent I made in your car. There were scratches in the bumper, already.

More like, the dent was already there I just cleaned the mud off so you can see it.

[Wayne]

Those cylinders may've last many more years had the Council not added chlorine to the water. It was the chlorine added by the Council that precipitated the failures.

Sorry, I don't accept liability for that dent I made in your car. There were scratches in the bumper, already.

The cylinders were holding together by scale and were going to go.
The car bumper was holding on by a thread and you drove over a pothole and it fell off - the pot holes fault?

[orion]

Are Investors paying their fair share?

One of the biggest misconceptions about property investors is that they are all wealthy. While some are, 99% of them are not; they have full time jobs and struggle to make ends meet like any other families. If a tenant doesn’t pay rent or unplanned maintenance needs doing, that money needs to come from somewhere. Sure it is usually tax deductible but you get to claim 1/3 of that back the following year.

The majority of property investors only have one or two properties as rentals. They pay tax on anything left over after the mortgage and all maintenance, rates and insurance which is usually very little - if anything. It usually takes many, many, years of investing in residential property before any real money is made. I know more investors that have gone bankrupt than I know that have been successful over a long period of time.
No investor I’ve ever met has wanted to be an investor so they could pay less tax. They go into it because they want to have a couple of properties freehold when they retire and not have to rely on the government supporting them (other tax payers).

I’ve been investing for about 30 years and started saving (starting with nothing) as much as I could in my early 20’s for a couple of years to buy my first rental. I bought a property with virtually no knowledge after saving $25,000 which was more than a years wages as a mechanic for me at that time. Seven years later, I sold the property for a $40,000 loss and ended up with no money once again (I also had a solicitor loan of $10,000 that was paid back as well as a few thousand dollars of principal on the mortgage that had been paid back).
However I did learn a lot from it and rather than giving up, I put what I’d learnt to use.
Now 20 years later, it is a lot easier because of what I learnt. Over the years I also learnt how to buy, renovate and sell properties so have completed hundreds of these over the years, as well as now having 80 long term rentals.
So GST as well as income tax is paid on the ones that we renovate and income tax on the rentals.

Combined, last year I paid several hundred thousand dollars in tax, and over the last 20 years I would have paid more tax than 90% of people would earn in their lifetime. For many people, that’s still nowhere near enough though. When people say pay your fair share, what is someone’s fair share? Tax them until it’s not worth doing any more? That is what I think will happen if yet more taxes, regulations, rules etc are bought in, not only with property investors, but with business owners as well.

If taxes are increased too much, you start losing tax revenue as people are driven out of the market. Government interference and wanting to do good for the very people they have made poor, makes them worse off in the end. With all the changes they’ve already put in place, many investors have sold up and if things continue, many more will do as well. Now there’s a waiting list of 10,000 people that have nowhere to live that the government is paying to have them live in motels, spending millions of dollars a week on accommodation for them. The very people that can rent them homes are the ones they are driving out of the market.
The government spends approximately $80 million every day, 7 days a week on Social security, welfare and the pension.
This is of course only a part of what they spend daily.
As mentioned the problem is getting worse with about 10,000 people now on waiting lists, our tax payer money paying for these people to live in motels.
The more regulations, rules and taxes they introduce will not help any of these people, the problem will just get bigger and bigger until they realise that you just can’t tax a country into prosperity.


Home ownership rates?

If more investors are pushed out of the market, there will of course be even less homes for people to rent; and the emergency housing list of $10,000 will keep growing.
What happens when someone sells a rental? One of two things, another investor buys it, or a person or family to live in buys it. If another investor buys it, nothing really changes. However if a first home buyer, or buyer returning from overseas buys it, it takes another rental property away from being able to house a family.
So where does the person or family come from before they buy this home? It could be that they had another home and are upsizing or downsizing, or they could have been renting. These situations again will not change anything, as it hasn’t taken another property out of the available houses to rent. However if they have been living with their parents or in a flatting type situation, this will affect the overall houses available to rent. Often a group of young people will flat together and when one of them is able to buy a home, they will move out, leaving the other flatmates. So in some scenarios, depending on where the buyer comes from will depend whether another rental is taken away from the available properties to rent.

If tomorrow I sold my 80 properties, there would be a variation of who the buyers are, but it would take away a portion of the overall properties in NZ that are available to be rented. The more that investors are regulated, controlled, told what they can and can’t do, and taxed, the more they will think it’s just not worth it and sell.
The government is in no position to supply 500,000 of the approx 1.5 million homes in NZ for everyone, if all the landlords decided to sell up, nor would many people want that.
About 35% of the population in NZ rent, which has slightly increased over the last 40 years but not hugely.
Another recent thing that has taken a lot of properties out of the pool of houses available to rent is people using their homes as Airbnb. The income is often a lot more than they would get letting them casually, as they would if they were rented to families on a permanent basis.
There are also a lot of RSC workers that come from overseas to pick fruit for five months of the year and they need accommodation. These again are a group of people that take up some of the available properties to rent.


There’s a Perception that investors are greedy.

I think it comes from a few things, ignorance being one of them.
Another is people’s own perception, or idea of money. The other perceptions originate from the media and the government.
When the government continues to tell the public that what is needed in the economy - ‘is to transfer money from people who are rich to people who are poor’, people over time get the idea that wealthy people are bad.

However, if it wasn’t for investors buying properties or business owners employing people, the country would be in a real mess. The media can often sensationalise headlines and people get a distorted view of the article just by a headline. How do I know that? In various articles I’ve been involved with and talked about topics, people jump to so many false conclusions without even reading further than the headline, then commenting.

There are a lot of people that think investors are greedy, pay no tax and contribute nothing to society. If you ask people to write down what is the first thing that comes to their mind when you mention the word ‘Money’, it will usually consist of a list something like this – ‘struggle, broke, hard to get, rich pricks, bills’ etc. To these people, their mindset is that money is bad, so people with money must also be bad! These are often the people that buy lotto tickets hoping to win a million dollars or more. The problem is, when people with a poor association of what ‘money’ is do win lotto, it is often gone within a short period of time. Why? Because they believe money is bad and so they have to repel it, or get it away from them. Wealthy people have a different association to money, so they attract it, not push it away.

When I employed people for a franchise I was in for 10 years, we had incentive targets for the employees. As a result of these incentives, they would often get a pay rise of $10 or so a week (probably $20 in today’s money). Each time this happened, the week after they got another $10, I asked if they now had an extra $10 left over to save. They always kind of looked at me weird and said - No, why?? 


How long does in normally turn investing into something profitable?

The first 7 years I lost all the money I’d put in. After that, I’d learnt enough to start again.

This was done in 3 ways:-

1. Buy and holds which are a long term investment, and the purpose is to pay the mortgages off over 20 - 25 years and then have the income. Until then, there is often not a lot of profit if any. Many investors will still be running at a loss many years later and the majority never get as far as actually paying their properties off and having the income.
For me, with buy and holds, out of the 80 or so from memory 17 have no mortgage on them and within the next 8 years or so, about 40 of them will have no mortgage. The rest will be paid off in full over the following 8 - 10 years.

2. Trading i.e. buying below market and selling, or buying, renovating and then selling. This can be profitable, however there are a lot more skills needed to do this well consistently. In the last couple of years, we’ve bought and sold about 50 properties. These are taxed at a higher rate than income tax, as we pay GST as well. Many investors don’t see the point in risking money doing this type of property investing, as a huge portion is paid in tax.

3. Wraps or more commonly known as rent to buys. About 20 years ago, I helped about 40 HB families into their own homes with me giving them a mortgage. I would buy the properties at a good price, about 10% below what would be considered their ‘market’ value and then sell them to people who only had around $2,000 as a deposit. A few I also did on no deposit. So I had a mortgage with the bank for say a 7% interest rate and would sell them on at market price to the first home buyer for around 8.5%.
They would also pay rates and insurance to me weekly which was included in their mortgage payment. This worked well mostly as it gave me about $50 a week cash-flow for each property for setting it all up, plus it got people into their own homes.
They could refinance at any time with a bank when they had enough equity, which in many cases was only 2 - 3 years. The problem was, two things happened. The banks decided they didn’t like it, and also the IRD wasn’t that favourable towards them. Some of it justified (because of investors doing things that weren’t ethical or made any sense) and some not. The government made up new rules as well with such things as the credit contracts act, and it just again became not worth the hassle of it all, so I stopped doing them.

Is there an adversarial relationship between tenants and property owners?

Sometimes yes, sometimes no. Sometimes justified and sometimes not.
We have ours managed so the tenants deal with our property managers who are great at what they do. Often landlords who manage their own properties will get themselves into conflicts with their tenants. Either the landlord is way too fussy how they want the property kept, or just don’t have the money for costly repairs. Now it’s getting worse of course with all the new rules with insulation, heating, ventilation as well as other things they keep bringing out. Many rental properties are better places to live than the investors’ own homes now, they just don’t have the funds to do the same things to the home they’re living in. This again is another reason more and more investors will leave the market, not being able to afford all the new government regulations. And of course on top of all that, they now want to tax capital gains.

[Perry]

Well, if David Lange was right, this will be the last Labour gummint for quite some time to come.

[Don't believe the Hype]

Well said Orion.

What we are likely to see which is what we saw in the grocery business. A consolation of ownership where mum and dad investors sell out, the larger landlords buy up controlling higher percentages of a given rental market.

Fairness - if we want to talk fairness we need to clarify that rental property providers have to pay GST on anything they buy but given they don’t charge GST on rents can’t claim the paid GST back. In the spirit of fairness residential property providers should get GST exempt status so they don’t have the EXTRA tax burden that other businesses don’t have.

There is an argument that rich pricks are aginst a potential CGT - I’m not sure that is the case. Rich pricks have already made their money tax free. By implementing a tax no capital now what it does is increase the barrier between the already rich and the aspirational. If I made $100m Capital Gain on my investments and businesses that I sold outfit before the implementation of the CGT the next generation will need to have asset gain of $130m to achieve the same $100m cash position.

In real terms the introduction of a CGT makes me richer

[Wayne]

Fairness - if we want to talk fairness we need to clarify that rental property providers have to pay GST on anything they buy but given they don’t charge GST on rents can’t claim the paid GST back. In the spirit of fairness residential property providers should get GST exempt status so they don’t have the EXTRA tax burden that other businesses don’t have.

An interesting argument.
As a business owner I pay more GST than I receive because I make a profit.
Seems I'm the one with the 'extra burden'.

[Don't believe the Hype]

Wayne - you misinterpreted extra... if you elect to be a GST registered business or have revenue above $60k (I think is the figure) you collect GST and you pay GST - the difference between the two you send to the IRD like the good little tax collector you are. Nett result is you are not out of pocket.

Residential property businesses even above the threshold you pay GST but can’t charge GST so you’re out of pocket by 15% on all goods and services bought by your residential property business

[Perry]

Residential property businesses even above the threshold you pay GST but can’t charge GST so you’re out of pocket by 15% on all goods and services bought by your residential property business

I'm not sure that a PI is "out of pocket." GST is a cost that is passed on in the rent.

Also, recall that GST was introduced by the socio-commies, at the time.

If GST had been made assessable on wages and residential rents, the Labour rabble would have revolted.

[Wayne]

I'm not sure that a PI is "out of pocket." GST is a cost that is passed on in the rent.

Also, recall that GST was introduced by the socio-commies, at the time.

If GST had been made assessable on wages and residential rents, the Labour rabble would have revolted.

GST on wages? Never heard that idea.
Was it an idea then?
Are you against GST Perry?

[Perry]

Neither for nor against GST.

Back when Comrade Commissar Douglas brought it in, one of it's selling points (if it could be called that) was simplicity. I.e. it applied to everything, including gummint services, etc. There were zero-rated and exempt exceptions like financial transactions, exports, wages and residential rents, etc.

I'm not suggesting that GST on those items was "an idea." Just that they were exempt, right from the start.

[orion]

Article - Two Types Of Investors


When it comes to property investors, there are two main types;

1. those that invest for capital gains and
2. those that invest for cash-flow

Investing for capital gains is more like speculating. The investor buys a rental property with the hope that it will increase in value. If that does happen, they will often refinance the property and buy another one with the exact same intention. The gross yield (the annual rent divided by the purchase price) often does not even enter their thinking when buying a property, as it is of very little - or even no importance. This is especially true when it comes to cities like Auckland (where most of the speculators like this buy) where the yields are very low, often 4 – 5%. Having a yield this low only gives the investor enough weekly rent to cover the interest on the bank loan plus hopefully a little left over for rates and insurance. Often there’s nothing left over for any maintenance. If interest rates went up 1 - 2% from the low where they are at now, these investors would have negative cash-flow, in other words they would have to top up their mortgages with their own money each week (negative gearing).

The problem with this strategy is that because they choose to use interest only mortgages (only paying the interest on the loan, and not the principal) the debt against the property will always remain the same. Their only hope is that prices increase so that at least on paper they appear to be better off. Their focus is often on looking for small parts of the city they think will go up in value more than others.
While I do have a few investor friends that have been successful long term using I/O loans (buying multi-unit type properties with good yields and some having up to 60 accommodation units per property), 95% + of the interest only investors sell earlier than necessary, and usually regret it later on.

I have many investors come to see me after they’ve been investing for a few years wanting help, having previously talked to their financial advisors/mentors and so called experts, surprised that they have no cash-flow. “What have I missed they ask? Should we buy more?” I say ‘Yes buy more just like you’ve been doing if you want to go bankrupt! The more you buy like this, the bigger mess you will be in and the more likely you will lose everything.’

For other investors like myself, we invest for cash-flow and whether house prices go up or down is of no importance. In the past when I’ve bought rental properties, I make the assumption that the property will go down in value after I buy it, so I need to make sure I buy it well, and also that it has good cash-flow. Good cash-flow to me means an 8%+ yield in a good location in a city with at least 100,000 population. (A 7% yield with a 20 - 30% deposit is fine for most cash-flow investors). With a better yield like this, there is enough cash-flow to also pay the loan’s principal, in other words using P & I loans rather than interest only loans. By using P & I loans, a small amount of the loan (principal, or the original loan amount) gets paid off every month. Over time a larger portion of the mortgage payment is principal and less of it is interest.
So when the property gets paid off in full in 20 years or so, the value of the property is of no importance. Whether it has gone up, down or is exactly the same value as when I bought it 20 years ago, doesn’t matter. Only the cash-flow is important.


CGT.

Already I’m hearing of investors wanting to sell now, especially in the likes of Auckland and Queenstown. Why? They are afraid that prices may drop and are also afraid of the potential capital gains tax. This would mean if prices went up after 2021 when the proposed CGT came in, any increase in their property prices would be taxed when they’re sold.
Capital gains investors overall tend to sell at very random times without any real thought or logic. These include when prices start to go down (when cash-flow investors like to buy more), interest rates go up, change of government policies, and also if prices have gone up - they like to sell and take the profit.
This is all very different to a cash-flow investor who is it in it for the long term. A cash-flow investor doesn’t care about price fluctuations or new government policies, as these things are not that important to the overall long term purpose. CGT doesn’t affect a cash-flow investor; as we don’t ever intend to sell.
Whether the government introduces it or not doesn’t concern me, however it will concern a lot of capital gains property investors. If these investors end up selling now or before any new law takes effect, there will be even less properties for tenants available to rent. This will mean even more than the already 10,000 people on waiting lists for housing. The government is paying for many of these people to live in motels.