IP and positively/negatively geared

[Erma]

Hi. I'm a newbie and have been reading quite a few of the topics, including one some time ago about negative gearing (seemed to be against it generally). I'm looking for views on negative gearing and whether it is worthwhile initially in an investment if that is the way you can potentially afford a more property in an area that interests you.

I own one IP. I bought it about a year and a half ago via the internet as I was overseas (family looked it over for me prior to my bidding at acution and subsequent offer). A mortgage broker helped out, I was able to make an unconditional offer for an amount less than they wanted (but I thought it was top dollar at the time) and got the offer accepted after a bit of a delay. I organised a local company to manage it and they seem to have done a great job - even rented it out at the maximum they thought it could get. One worry I have is that because everything has run so smoothly, I may have an overly optimistic view of what can go right... This property was initally negatively geared (no tax benefit against my income since I was earning overseas) but I repayed two variable portions of the mortgage in the first year and it became positively geared (just) after the first full year.

In any case, in just over two months I arrive back in NZ (permanently) and am keen to buy again. I'm less sure about the market at the moment though... However, I will have a good salary and about 50% equity in my existing property, plus a deposit towards a new one so I think I am in a reasonable position. My current property is a 1/4 acre in Tauranga and I'd like to buy in Tauranga again; the figures I play with all come up negative - but with potential to be positive in one to three years if I make additional repayments for the spare cash I have from my salary. My current primary reason for investing is to create myself a potential future income - you might call it my own 30 year pension plan.

What are your views on whether it is a good/reasonable business idea to initially go in negatively geared, make additional repayments (anytime if variable portion or when refixing if not) in order to get a property in an area like to get good capital gain over the next decade or two. I'm worried that if I save for another couple of years, the house price will have gone up and effectively wiped out the additional money I will have saved in that time. I'm definitely open to learning and acknowledge I'm a real beginner. Thanks for any thoughts you share. Erma

[fudosan]

Hi Erma, welcome to the forum

If you are a high income earner, not a big spender, and you really don't need the income from your property investment, you can afford to buy negative cashflow propertis that have good capital growth potential. Just use your extra cash each month to pay down the mortgage as much as you can. My 2c worth.

[Propoholic]

Hi Erma

Have a look at the topic on this forum: 'Another Newbie with First IP Questions'. Discussion is very pertinent to your position.

I believe we have passed the peak in this property cycle (as with Australia, UK etc).

A negative gearing strategy (for good capital growth properties) will be viable in a rising market with accompanying rental increases. I purchased two in 1985 that were negatively geared; with the following two years of capital/rental growth this proved viable. I purchased one in early 1989 that was negatively geared, this was not so smart with another 5 years of softening property and rental values to follow.

In 1991/1992 as in 2000/2001 the general public and media viewed property as a poor investment option!

Read as much as you can on this web site and from books and join your local Property Invesors Association. Read the Bank of New Zealand (BNZ) weekly economic overview available on their website or via email.

[Dean@Massiveaction]

You'll get lots of good advice here and differing views, but the bottom line really is this. If you want to buy an occasional property and have strong income and no intention of retiring, then it doesn't really matter about gearing. However if you want to seriously invest and build a significant portfolio then buy at least 5 pos cash flow pre tax properties for every neg cashflow one. Then you will be able to keep buying. Otherwise if you buy neg cashflow you will quickly paint yourself into a corner adn not be able to keep investing. I did that when I started and it took me a year to get going again.

[Erma]

Thanks for all the great tips and advice. I have a lot of food for thought. Yes, I plan to buy and read lots of relevant books when I return to NZ in a couple of months.

[Marcus]

Hi Dean,

Could you clarify this for me please?

However if you want to seriously invest and build a significant portfolio then buy at least 5 pos cash flow pre tax properties for every neg cashflow one.

Why would you bother buying the negative geared property?

Comments appreciated.

Regards,
Marcus.

p.s. Perhaps you might like to get Lisa Dudsons opinion on this too. I would love to hear her spin on that theory. Thanks in advance.

[Dean@Massiveaction]

The negatively or neutrally geared one would be a capital growth property.
Lisa would agree with me as I do her property mentoring now!!
Basically if you want a significant capital growth property it will often be neutral or negative, so you use 4 to 6 pos cash flow properties to support it. Obviously this depends on your rules. I only want cashflow so I personally don't bother with capital growth properties, but I don't want to have to work in a normal job!!

[Marcus]

Basically if you want a significant capital growth property

Hi Dean,

Could you please describe for me what you mean when you say "a capital gains/growth property"?

Thanks,
Marcus.

[Dean@Massiveaction]

Hi Marcus,
I can't decide whether you're playing games with me or not as I think from your other posts that you would know what I mean??
But a significant capital growth property would be where you have researched via the likes of Hybrid hotspots, or your own research, an area that is likely to have above average capital growth and find a good property in that area.
Capital growth often goes out in ripples from a city centre, so you can research where the last ripple is and buy in the next zone outside that and you are likely to get better than avarage capital growth.
ANd once you have lotsd of surplus cashflow you can go for waterfront property which is probably the ultimate in Auckland for making money, but you need very deep pockets if you aren't there already.
Hope thhis answers your question

[Marcus]

Hi Dean,

I'm not playing games here. Thanks for being patient and taking the time to reply.

There are times when I would rather have someone explain more clearly their interpretation of something rather than jump in and make a comment base on an assumption of what I think they may be trying to say. (Phew, that was a mouthful!) Speaking out loud too soon can have one suffering from "foot in mouth" syndrome of the human variety.

I have recently witnessed peoples ideas challenged on what they believe "capital gains" properties to be. The preconception was that houses in more desirable areas experienced a higher percentage of capital growth than those in less desirable areas. Your water front comment may suggest that you, to some extent, subscribe to this belief too.

Recent price hikes in lower socioeconomic areas and negative growth towns would play this theory down. The ripple effect that you mention being a major contributing factor to the recent capital growth in our smaller towns.

But a significant capital growth property would be where you have researched via the likes of Hybrid hotspots, or your own research, an area that is likely to have above average capital growth and find a good property in that area.

This is a different description of a "Capital Growth property" from what I have heard or read and is a good example of why I posed the question in the first place. It does however lend itself to being what some may deem "speculative" and the strategy would only be applicable in a rising market. Poor "Timing" of the market and the lack of an alternative strategy may in part explain why many (if not most) people fail to succeed in PI.

Thanks again for your clarification.

Regards,
Marcus.

[Dean@Massiveaction]

G'day Marcus. You're right that capital growth has a speculative aspect to it. I do believe however that the fundamentals don't change. Even in a slump there will be areas that do better than others. At the end of the day if you follow historic trends, Kieran Trass's specialty, then there are always areas that outperform the average and they can be prdeicted with a reasonable degree of success.
For example at the moment with the announcement of the toll road through Puhoi, prices in Wellsford a re starting to move. YOu would have to be very unlucky to buy anything in Wellsford currently and not expect higher tahn average growth over the next 2 to 3 years. Now that may mean that Auckland is doing zero growth and Wellsford is doing 5%. But it could also mean that Wellsford might gain 10 or 15% a year while Auckland stands still.
For me personally I try and keep things very simple. If it puts money in my pocket pre tax on the day I settle it was a good deal. But I keep up with all the other info to be better able to help others achieve theri investing goals.
Glad to hear you're not yanking my chain.
Your comment about areas is very valid. BEtter areas do not equal better gains. Look at Epsom, it's one of the worst capital growth areas in the last 10 yeasr but one of the "best" areas.
I've got quite a bit of property in Papakura that has enjoyed huge capital growth and I only bought them for cashflow!!

[Julian]

Poomba,

Look at Epsom, it's one of the worst capital growth areas in the last 10 yeasr but one of the "best" areas.

Your comments about Epsom would indicate that all areas have their cycles, yet the cycles are not aligned. Because Epsom has been in a relative trough for the last few years it could be the perfect time to invest there - but this is purely speculation.

Your comment about waterfront being the prime capital gain area similarly may not take into account that waterfront land might operate on a different cycle which my make it comparitively valueless once again - particularly if there is a naval invasion (Sydney's exclusive Double Bay had a significant price drop when the Japanese subs paid them a visit in WW2), if private transport becomes prohibitively expensive, if global warming raises the sea level, or if we are hit by a Tsunami.

Speculative purchases can pay huge dividends, but some people inevitably get burned.

Positive cash flow deals, it must be added, are speculative to an extent as well. When we buy positive cashflow properties we are speculating that they will stay that way. Those that bought them in Chernobyl (assuming it was possible) might argue that they are not bullit proof.

Hmmm... I've gone full circle. Therefore all investments are speculative. Where's that Lotto shop?

Julian

[Dean@Massiveaction]

Exactly, if youwant no risk, stick your cash under the mattress and buy a smoke alarm. Life is speculative and risky. In fact no one gets out of life alive!!

All I can tell you is that my speculative investing meant I could retire after 4 months and now I invest full time for fun and profit because I can!!!!!

[Erma]

Hi. What interesting reading these postings have made! I'm now thinking that the idea of cashflow properties sounds like an idea for me to follow-up. I think I need to think much bigger than I have been as obviously a lot more is possible than I had dreamed of. It amazes me that some people can seem to buy so many properties quickly, but I'm getting the message that cashflow, cashflow and cashflow might be a key determinant. How do you convince banks you have the cashflow to be able to buy again (I used my salary last time to convince the bank)? Tenancy agreements? Evidence of payments from bank statements? Or, is showing that a property will make money (postively geared) not take money enough for some sway?

[muppet]

Hi Erma

You Said

I think I need to think much bigger than I have been as obviously a lot more is possible than I had dreamed of. It amazes me that some people can seem to buy so many properties quickly, but I'm getting the message that cashflow, cashflow and cashflow might be a key determinant

Well to quote Chris Ashenden in his last post:

1. I invest in real estate for PROFIT. CASH, CASHFLOW, and EQUITY. I want you to show me the money and I don’t care if there isn’t a single L for LOSS in there. I’m not interested in a system that is based on LOSSES and NOT DOING VERY WELL.

2) I do not want to HOLD, CREATE or GROW wealth in my own name. That is the number one point.

You seem to be getting the idea.

Regards