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  • Advice for young generation

    Following on from another thread I have now decided to write some timely advice for young people to assist them into investing.

    There are many options to get you on track.
    -Stay home buy rentals etc
    -The following option I discuss with the younger people I work with is a win win.

    If possible buy a affordable house to live in and get flatmate's/ boarders. There are a few things you need to do here:

    Deposit. Obtaining the first money to get started is hard. Can you work extra hours? The amount of work you put in at the start of your investing career is directly proportional to the gains. Maybe borrow from parents? Go partners with them on your first place etc. Think outside the square.

    First house. It needs to be affordable. Many young people want to max out and get the nice house straight away. There is time for all this in years to come. You want to get a place that you are not
    struggling to make payments on. If you are working extra hours to pay for it you will not have spare time for the add value stage. You need to be comfortable and have ability for surplus cash if possible.


    Add value. Buying a affordable house which has the potential for minor make over. The key here is keep it simple, this is your first house and Reno's can get out of hand. You want a place that is in the minimum suburb your ego will let you live in. Paint the rooms, tidy up the house change, light fittings etc. Do all this minor work in your spare time as funds allow you. The work should only be minor. Some people start a job and give up half way through. If they are minor you are more likely to finish them. Doing all this work may increase the value of the property.

    Pay down debt. If you finish tidying up house why not pay down some debt with the flatmate's weekly rent.

    Move on/ repeat process. Time to realise you potential. You have done the hard yards sell the house and take the cash. Use cash for deposit on another place. The reason I mention sell is important. *You may have bought a undesirable house in a bad suburb to start with and not want it for a rental. *The present mortgage on it is not tax deductible and you would need to sell it to another entity to be able to get deductions. *Your first house may be emotional and if you are attached to it never make it a rental. *Cash is king. There is no other better incentive than getting that first big pay out. You can know see in real terms your reward.

    Structures. Some young people have a sum of cash already saved or may have property previous. If this is the case then get a Trust Structure set up. You can protect the savings or the property now. You may currently have a girlfriend or boyfriend and later decide to move in together. Trusts are a good way to protect yourself if you are concearned with “what could happen”.
    Last edited by whitt; 02-06-2006, 08:25 PM.

  • #2
    updated.2/6/2006
    Now includes structures.

    Comment


    • #3
      good advise for those starting out Whitt. i noticed you joined the same time as me and you have done over 700 posts, i dont think i have reached 150 yet. Oh well I guess thats the price I pay by travelling the world alot without the computer (by choice)

      I beleive the structures is extremely important too, our son bought his first house last year and we insisted he set up a family trust first to put it into. You just never know what is down the track and you dont want to have all your hard earned cash go to someone else just because they decide they dont wish to stay with you any longer. He isnt in a relationship at present but it will happen one day so best to protect ourselves we say.

      Our sons is a rental house though not his own home, he still lives at home with us. And is tomorrow about to embark on the first do up my husband and him are doing it. He has decided he will probably need to set up a trading trust now too as he now sees it is the quickest way to get ahead. the other house is in a buy and hold entity. The do up is in our trading trust though so he is just getting some wages for helping. He suggested a profit split but I said NO you find your own house if you want to do that, need to encourage them to do some work, cant give everything to them. It is the old saying I beleive, give a man a fish feed him for a day, teach a man to fish, feed him for a lifetime.

      Nice to see your family following your footsteps, even though it is only in a small way, it is a step in the right direction.

      happy investing everyone.

      Robyn

      Comment


      • #4
        Make Equity on Purchase!!!

        Hi Whitt,

        I agree with Robyn - good advice for those starting out. However, I don't think this advice is relevant only to the "younger generation" (which I think I have just graduated from). At the moment I'm helping a friend in her late 30's look for her first property (to live in). Your points 1 - 4 (Deposit, First House, Add Value, Pay Down Debt) are directly relevant to her situation.

        To these four points, I would add a fifth: Make Equity on Purchase. I think that first-timers (and this includes me starting out in investment) need to be made aware of the importance of buying below market value. (I have been made aware of this through the forum.) We bought our PPORs below MV twice (although not a lot below), perhaps more by luck than good management, and this has helped us immensely. In the case of my friend whom I'm helping, she has $10K net equity (but with a high salary, so good ability to service debt). In her late 30's, she feels really bad about this. I have told her not to feel bad - $10K is a 5% deposit on a $200K property. It'll get her in the market, and away from renting. (Hope her landlord is not reading this!) So we're looking for a property that meets certain criteria, one of which is that it must at least triple her equity on purchase. I know, this "only" equates to buying a house that would value up at $220K for $200K, or a 9.1% discount. Personally I will be looking for a better discount than this, unless cashflow is great. But I'm in a different place than she is right now. I don't think we should underestimate the positive effect that tripling one's net worth can have for someone starting out. In fact, I'm sure everyone would be happy to triple their net worth with a single purchase!!!

        Not only do we need to be made aware that Making Equity on Purchase is important, we need to know that it is possible. In my experience (with friends and family), those just starting out don't know that it is possible to negotiate a price. They think that putting an offer in that is $7K less than asking price (on a $300K house) is "playing hardball". True story - I was looking at a house last Sunday, and the RE agent had to leave me to welcome another viewer. When she came back she was with...another friend of mine. Once we were away from the agent, I asked him what he was doing at the house. He replied: "Liezl [my wife's name] mentioned that property investment is a good idea, so I'm looking to buy a house." Now, I wasn't looking at the property as an investor - it would make a poor investment. I was looking (for a second time) because it was located directly behind my house, and I was on the way home from buying milk when I saw the home was open. Anyway, I digress. My friend asked the agent a question, which blew me away. He looked at the asking price and said "Do you think the sellers will be negotiable on price?" Every agents wet dream. (I think I'm going to need to save him from himself. He has made really bad financial decisions in the past, a big one like this could financially cripple him.)

        Another (relevant) true story: I was having coffee with a RE agent (who will be my buying agent) yesterday (at my house) - I'm usually too cheap to fork out for the cafe stuff, although Robyn (NZGEMS) got one out of me - money well spent!). She recounted a recent experience of her's. Young couple, fell in love with a house at an open home, put in a cash unconditional offer on the spot. The agent was furiously filling out S + P while others were wanting to be shown the house - she was saying "I'll be with you soon", trying to hide the big grin on her face. the purchasers asked (sheepishly) whether the agent thought an offer $5K below asking price would be O.K. (The agent replied: "You work out what you want to pay for the house, and that's your offer.") They bought the house for 5K less than asking.

        So, another rule: Make Equity on Purchase. Its both possible and important.

        One final thing. Whitt - your fifth "rule" was:

        Originally posted by whitt
        Move on/ repeat process. Time to realise you potential. You have done the hard yards sell the house and take the cash. Use cash for deposit on another place. The reason I mention sell is important. *You may have bought a undesirable house in a bad suburb to start with and not want it for a rental. *The present mortgage on it is not tax deductible and you would need to sell it to another entity to be able to get deductions. *Your first house may be emotional and if you are attached to it never make it a rental. *Cash is king. There is no other better incentive than getting that first big pay out. You can know see in real terms your reward.


        This sounds like you are recommending that the cash from sale be used for a deposit on another, better, property, which the investor can again let out to roommates, renovate, and so on. If this is the case, then the mortgage on that place would not be tax deductible either. Perhaps the goal is rather: get enough equity in the first place so that, when sold, one can buy both a desirable PPOR and a cashflow +ive rental. Rental mortgage, which is deductible, on IO. Excess cashflow to pay down debt as quickly as possible on PPOR. Two properties, twice the growth. Millionaire in the making!

        Paul.
        Last edited by Marcus; 03-06-2006, 09:37 PM.

        Comment


        • #5
          Totally agree with superdad on buying below Market Value. My first PI was bought at 10% above MV. I bought this in the boom of 2004 in Wellington. Though it has had capital growth 15%pa, would have made more if bought below MV.

          I don't regret the decision of buying but first investment may be bought on emotion..

          Comment


          • #6
            Paul some great points. There are so many options available for a starter if you just think outside of the square.
            I must say that your posts have continually been thought provoking and you have the mindset to suceed.

            Comment


            • #7
              Develop to add value too

              Appreciate your abundance shown yet again Whittaker. The advice you give people strating out is great.

              I slightly disagree about advice you have to buy below value. Recently I bought a property only a couple of grand under RV, then did it up, developed it by getting building consent for a minor dwelling and added nearly $100K to the project, allowing me to recycle my deposit into doing another minor project with similarly fantastic returns.

              There is no problem buying at valuation if you are "creating the deal" by a renovation and/or development. It's working really well for me and my clients now.

              Comment


              • #8
                Hi David,

                I had a big long post typed out, but then my computer did something untoward. So I'll cut to the chase:

                Why buy at MV when you can by below MV?

                Here are two of my reasons for thinking it is important for first-timers (and the equity-challnged, A.K.A. cash-poor) to buy below MV:

                1. Instant increase in net wealth on purchase. whether the person is 18 or 38, they have worked very hard (usually for someone else) to save their deposit. I think that it is very important for this group to see their hard-earned money working for them immediately, and doubling or tripling net worth on purchase is the best way of doing this. (Of course, there still needs to be opportunity to add value.)

                2. For first-time investors, I think it is good to buy below MV so that they can quickly recycle their equity for a further purchase. Now, they might not do this, but at least they can if they want to. Who knows, a good deal might come up which would be lost if equity will only be gained after renos and/or development. The lesson here (and one that I'm conscious of starting out) is that a property purchase is not an isolated event. We need to be very aware of how any purchase will affect our future borrowing and servicing ability, both in the short- and long-terms.

                I'll be interested in your reasons for having clients buy at or slightly below value. I can imagine what these reasons are, and they will be very good reasons for some investors. But to keep this post short (by my standards), I won't hypothsise here.

                Best,

                Paul.

                Comment


                • #9
                  Fantastic replies, much appreciated guys!

                  I have around $50,000 to start in property with, and have know problem understanding the vital importance of buying below MV and making instant profits.

                  So my key question would be is how do you know what Below MV or RV is? It it just a matter of learning the area and recent sales?

                  The problem is that when you try to get this money out you get stung with Agent costs which eat into your profit from buying below MV.

                  I really can not decide what is the best option, buy a place to live in or rent and invest. It would be harder to add value to an investment property having tenants in it.

                  Cheers
                  James
                  James

                  "Time is the great equalizer. It will either promote or expose you." -Jeff Olson

                  Comment


                  • #10
                    I think the best piece of adviuce is buy the cheapest place you can live with, and to pay this off as quickly as possible. I shudder at all the people whose first home purchase is at the maximium that they can borrow...

                    Personally I'm not sure on the sell and trade up option. Because of the transactional costs, and that alot of the gains you make are likely to be the result of inflation.

                    I'd prefer to go with revalue then use your increased equity to purchase as a rental the house you want next... paying it off as fast as you can, hopefully also buying some other rentals at the same time. Now no doubt the house you want next won't be a good positive cashflow rental, but at least the mortgage repayments for the place that will eventually be your home will be tax deductable.
                    New to property investing? See: Best PropertyTalk Threads for New and Old Investors And/Or:Propertytalk Wiki

                    Comment


                    • #11
                      Hi James,

                      You're right when you say:

                      Originally posted by Volatile
                      So my key question would be is how do you know what Below MV or RV is? It it just a matter of learning the area and recent sales?
                      Yep, its pretty much a case of learning the area and comparing recent sales. However, the devil is in the detail. I have found that "Learning the area" takes a lot of time, which is why I am restricting myself to one or two locations (within a single city) for now.

                      Anyway, you also wrote:

                      Originally posted by Volatile
                      I really can not decide what is the best option, buy a place to live in or rent and invest. It would be harder to add value to an investment property having tenants in it.
                      You're right - you can do renovations on a place you are living in. That's a big tick in the "pro" column on my thinking.

                      I would say that the best option starting out is to buy a place and then let one or two of the rooms to flatmates. As a quick example, if you purchase a 4 bed house for $200K, and let 3 of the 4 rooms for $100p/w, then that $300pw rent will cover the interest payments on a $200K mortgage at 7.5%. You'll basically be living there for free. That's gotta be better than paying rent to someone else, even if you do have an IP! Of course, rates, maintenance, insurances etc. will eat into this $300pw. Also, you'll need to declare 20% of the rent payments ($60pw) as your taxable income. However, this can be offset by claiming expenses, as explained in the following IRD booklet:

                      http://www.ird.govt.nz/resources/fil...52be/ir264.pdf

                      Part 3 is the relevant part.

                      If you only put down 10% deposit ($20K) on a $200K house place, and allowing $5K for purchasing costs and getting the place to a state where you can get flatmates, you'll still have $25K left. Further, because your flatmates are basically covering the mortgage (on IO, I'd suggest), most of your income will be free. The banks will like this when it comes to calculating serviceability on your next loan. The good thing about buying the second property will be that all of the interest payments and expenses will be deductible.
                      Last edited by SuperDad; 03-06-2006, 09:41 PM.

                      Comment


                      • #12
                        Some great food for thought here.

                        Originally posted by Whitt
                        If possible buy a affordable house to live in and get flatmate's/ boarders.
                        It would make better sense to me, to stay renting/boarding @ $80pw + costs, and fully renting out the first investment, thus making all the interest and associated costs (purchasing, rates, insurance, maintenance...) tax deductible. The quality of life would be the same as either way you are living with flatmates.

                        Surplus funds that had previously been used to accumulate savings could be used along with any tax breaks, to lower debt (perhaps by way of RC a.k.a. revolving credit). As this RC is paid down the available funds would be used when needed for maintenance/repairs, rates, insurance, improvements or perhaps even a deposit on a second investment.

                        With statements showing where the money came from, money from this account could be taken to another lender avoiding cross collateralisation or as Kieran puts it "The One Bank Trap".

                        Unnecessarily selling a property does incur costs. Agency fees, solicitor costs, possible depreciation clawback etc. Avoiding an unnecessary sale could (and probably would) save thousands.

                        Cheers,
                        Marcus.

                        Comment


                        • #13
                          Good point Marcus - if you board and buy an IP, you get the benefit of being able to deduct the interest on the loan.

                          My thought was that if you bought a place to live in and rented rooms out, then if you did it right you would be improving your ability to service debt. If you are paying someone else $80pw, you are reducing your service-ability by that amount.

                          In the end, its a pretty complex calculation, isn't it? And remember, its not just financial considerations that come into play, unless you really don't care where you live. You might want to live in good accomodation! You might enjoy DIY, and so want to live in a place you can do things to. Of course, this differs depending on the stage one is at in life. In my late teens and early 20's, I didn't care where I lived. Now I do - I have children, and so having a section, proximity to schools, and even having a place I like is very important. Sure, we could trade down, and that might make good sense financially, but there are other factors that need to be taken into consideration.

                          Good luck,

                          Paul.

                          Comment


                          • #14
                            Originally posted by SuperDad
                            My thought was that if you bought a place to live in and rented rooms out, then if you did it right you would be improving your ability to service debt. If you are paying someone else $80pw, you are reducing your service-ability by that amount.
                            Hey Paul,

                            That $80 the new investor spends renting or boarding somewhere else, is made up by the person paying rent in the room in his rental that the new investor would otherwise be staying in.

                            An exception may be if one is able to charge enough in board (excluding their own room) to equal market rents for that house (effectively achieving free accommodation).

                            There are plenty of different ways to make (and lose) money in property and no one way is necessarily better than any other. The important thing is to be taking part for the long term to reap the rewards.

                            Cheers,
                            Marcus.

                            Comment


                            • #15
                              I still like Pauls plan (Almost, why IO on a PPOR?) since you have the added advantage of the property increasing in value over time, thus increasing your equity.
                              New to property investing? See: Best PropertyTalk Threads for New and Old Investors And/Or:Propertytalk Wiki

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