Now What?

[AustinWong]

Well,

After months (more like year) of thinking, planning, reading and getting all set at the start line....my wife has told me she does not want to invest in rental properties at this point in time.

She feels the risk being too high and does not like the idea of tenants trashing the rental.

For the next few years she would rather buy a plot of dirt and sit on it, with the option of buying rentals when the kiddies are older and less dependant on us.

hmmm...so I am down the gurgler abit on this one, a wee bit disappointing.

Anyone have any suggestions on where best to buy a $50k bit of dirt to mooch over? I reckon it is a bit mad to pay for bare land but I would rather that than nothing.

Your thoughts?

[Marcus]

Hi Austin,

Just a few questions.
What would be your purpose for buying vacant land?
Could it be viewed as speculative?
What return will you be getting on a vacant section?

How much does your partner understand about property investment?

Regards,
Marcus.

[LondonKiwi]

My advice is don't do it! (ie see what Marcus is telling you)

If you put down 50K on a piece of land what is your return on this? Nothing. You get no rental return as there in no building and therefore no tenants. Three years ago this may have been a wise move with land values increasing steadily. With most commentators suggesting that property prices have peaked and will potentially drop by 5% next year, that land is just going to be tied up capital if you ask me. You might as well leave that money in fixed term deposits where you can get 6+%.

The only other reason that would make sense to me is if you were going to build / develop on that land. That would be a different matter but if this was not for a few years and you were relying on capital gain, I think that would be very speculative in this market.

On your wife's reluctance re tenants etc remember this. If you buy the right property in the right area you will attract the right tenants. I have a property in Inner city Wellington that has had only four tenants in 12 years. One tenant was there for 6 years and we have never had a late payment or any trouble whatsoever (touch wood!). Outgoings to me have been the installation of another smoke alarm, cleaning of carpets (to protect the investment and to market it better between tenants) and the odd minimal maintenance. I think in the 12 years we have had a total of about 6 weeks of non occupancy. Also in that time the property has more than doubled in price. Now if we had thought along the same lines and held off purchasing we would have missed out on this great little earner!

The other thing to remember is this. The tenants are paying the Bank back not me! The yield is about 8% but more importantly the Bank financed it and the tenants are paying the Bank back!!

[snow]

Re: Now What?

Your thoughts?

Wife will also find 'excuses' not to buy bare land........just kiddin

[Marcus]

Three years ago this may have been a wise move with land values increasing steadily.

This I believe is called 20/20 hind sight vision.

With most commentators suggesting that property prices have peaked and will potentially drop by 5% next year, that land is just going to be tied up capital if you ask me.

I have been hearing the word "peaked" for the last 12mths. Do they really mean it this time, or will they mean it next time?? Should it matter???

The only other reason that would make sense to me is if you were going to build / develop on that land.

You would need to be clear about your intent here as there could be tax implications.

if you were going to build / develop on that land. That would be a different matter but if this was not for a few years and you were relying on capital gain, I think that would be very speculative in this market.

Or any market for that matter. That is where the intent or purpose for the building would be important.

Regards

[Marcus]

Austin

Also, with bare land, the ability to leverage is diminished. If values do nothing for (Who knows) say 5yrs, it has been a liability (Rates). At the same time, if you borrowed from a bank to finance any part of it has been an even greater liability. You will also miss out on being able to do the "101 things to improve the value of the property" not to mention rents.

One more question.
How exactly, does this fit in with your financial goals?

Cheers,
Marcus.

[Gerrard]

Hey Austin - I did a real rough calculation. A 50k piece of land will cost you around $6,000 a year in mortgage repayments (P&I) and rates.

A $150k property that is rented for $200/w (6.9%) will cost you around $3,000 a year (P&I and after tax refund).

So if you buy in the right place to minimise the risk of tenants trashing the place, you will be $3,000 a year better off. Have you tried this scientific approach with the other 1/2? If that doesn't work you could always go for the emotional "we're doing this for the good of the kids" or even better "don't you trust me". Hmmm, maybe not the latter.

Gerrard

[fudosan]

Re: Now What?

She feels the risk being too high and does not like the idea of tenants trashing the rental.

What specific risk is she concerned with? Is speculating in non-income producing land not even more risky?

If you don't like managing tenants, you can shop around (hard) for a good property manager to screen and select good tenants. Buying in a good area also helps.

[grotto]

I've never really invested in blank land, but got a couple of sections as part of a deal just over 2 years ago. Market value was about $80K then, and I've had people offer $110K for them now, so they've actually turned out OK.

I've also discovered that the grass does not seem to get any higher than about 3 feet, so there has been no maintenance, and rates are really low.

I still prefer the house & land option, and I'd guess I've had a larger capital gain on those than just the land, but buying blank land is probably better than doing nothing.

Good luck with whatever you do!

[Shar]

Hi Austin

If you want to be a property investor, then you will need negotiation skills when purchasing properties. You have the perfect exercise here to convince your wife you know what you are doing.

I would suggest first of all you set down on paper the figures to show her what your purchase costs will be, rental income and all outgoing expenses so she can see clearly exactly how much the property will cost you or hopefully how much you will get out of it.

She is correct in worrying about the tenants. However if you are careful to buy in the right area where you will attract the right tenants, you get the maximum bond to cover cleaning etc and more importantly you take out landlord insurance, then you are covered. I suggest you get a brochure on some landlord insurances to show her what they cover.

It is no good buying property if you can sleep at night but she can't. So it is up to you to show her that you are not risking the family home etc. Doing this exercise will also help you to better understand what you are doing.

Being a cautious person myself, I can fully understand her reticence (it took me 10years of reading, learning etc before I took the plunge!)

Good Luck!

Shar

[Ianacek]

Vacant land always gives the greatest total return, but it offers the ultimate in negative gearing as well.
Land investing gave me the capital to start landlording for a career - so it can be done.
You wouldn't want to pay very much for the land, so that ideally you can diversify into different areas & markets.It will be hard to find well-priced sections in the current market. However, don't let this discourage you.
Its as simple as identifying sections & asking yourself "What will this neighbourhood look like & be owned by in 10 years time" & "If an economic tsunami arrived during my holding period, would my financial structure be strong enough for me to hold on n o matter what?"
They aren't making more land, but population increases & so does national productive capacity. Vacant land , well purchased, can offer returns of 40% p.a. + average compounding over 5-15 years if you do your homework well & buy at the right time in the cycle.
There are a lot of holding costs & a lot of research & plannning work to be done. It's only for those who are sincerely interested. Read Napoleon Hill's "Do you sincerely want to be rich?" (Hint: Emphasis is on "sincerely" rather than "rich" )
Your situation is unusual in that I have found most women don't have the taste for vacant land investing, & often end up seling when things get tough - which is usually the wrong time to sell. Some of the things that happen, which you have to take in your stride area) Council puts rates up in double digit rises, (b) Council asks you to dispose of some rubbish someone has dumped on your land overnight (c) Council asks you to mow regularly and/or eradicate noxious weeds (d) neighbour(s) ask(s) for a 50% fencing contribution (e) Council tries to rezone your land downward & money must be spent on solicitors , research & submissions (f) Neighbour builds a deck right below a large overhanging branch from one of your trees - then asks you to cut the branch off ( costly, because the branch is 30 metres up & needs a cherrypicker) because if it falls on his deck or himself , you will be liable ( it turns out he is correct) (g) Water supply or sewage is introduced to a developing area, but cavant land must pay the connection fee as well as homes. I could go on... but you will get the idea.
Wouldn't a straightforward rental be simpler? Or maybe you could compromise & do both?

[AustinWong]

Wow !! Great feed back everyone. Really appreciated.

I will let my wife read the info and she can perhaps get a clearer picture. Often it helps if your spose is not giving you the "facts".

Cheerio

Lawrence

[drelly]

Hey Austin,

Your wife's reaction sounds like a very emotive one rather than one based on understanding of property investment. I'd have to say that while a marriage is a team thing, if she's not prepared to learn about it as much as you have been, then she either needs to make the effort or leave it to you! Harsh I know but that's the bottom line no matter what you decide to invest in.

Risk is relative... risk of making a real cashflow loss? You'll do that every year sitting on dirt and making repayments yourself, no matter what the capital gain. Buying land is speculative... ie; gambling. Sure, you may get it right but I'd rather have tenants making the payments for me.

[Marcus]

To me the biggest risk of all is taking the gamble that there will always be a welfare system capable of taking care of me when I am too old to work.

And as one sits pondering whether or not investing in their financial future is a safe option, they are losing a precious asset that can never be reclaimed.

Time.

[AustinWong]

I follow your reasoning Drelly, cheers for that. Only prob is that if I do any bulldozing and any thing goes amiss in my decision making with the investment...you can guess what may happen..... kapow kapow... hahahha.

I have been looking around northland and have kinda figured that you need to spend at least 100k to buy anything worthwhile. ouch!

So say I have no option to buy a rental but land which is better than nothing I reckon (perhaps this is not the right part of the forum for this discussion at this point but can always be moved I guess)

Anyway.... if say I bought 5 acres or moreand leased the land out, apparently I can claim expenses on mortgage.

Say I borrowed $100,000 @8.5%.

Payment in year 1 $9662.76
Interst Paid $8453.62
Principal Paid $1209.14
Lease Income (10acres) $1000.00

So effectively what I will pay in year 1 is:

$9662.76-$8453.14+$1000 = $2209.14 = $84.97per fortnight.

Well it woudl appear to me that at least in the earlier years it would be cheaper to own land than become a chain smoker .

Be a savings plan anyhow i guess.

Feel free to pull me apart folks. But do mention any good bits you see.

Cheery

L