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**Josko** · 17-01-2005, 07:49 AM

Re: The path to beat for my first IP

Hi AustinWong

Originally posted by AustinWong

Hi everyone,

- Buy 3 IP's (investment properties) as part of an investment portfolio but not more than 4.

What are the reasons to stop at 4? What additional strategies did he advise?

**AustinWong** · 17-01-2005, 09:00 AM

The main reason for our meeting was to figure out the best areas to invest and learn more about the dollars side and learn abit more on how to see if a property stacked up.

With the capping of number of IP's and getting into other forms of investments, I believe is a way to spread risk.

I guess there is no reason why you cannot have more if that is the investment type that you are comfortable with.

Others on this forum appear to have been very succesful with much more.

I will probably cap off at 3 myself just to keep things more manageable...buuut in saying that I haven't bought one yet and may find I will buy more.

No other stratergies for us, but he did say buy one and get comfortable before buying more.

Oh yes, he also said to make sure that we do not use all our equity to buy the IP and place minimum deposit which will mean using lenders insurance. He said to capitalise the lenders insurance into mortgage.

Also as we have being paying our own home faster than need be we have aredraw facility. He says that this is good.

He also advised that we should keep our investing in perspective and while we should focus on investing for the future we shold also leave money to be able to live for today.

Lawrence

**Monid** · 17-01-2005, 09:05 AM

- With investing, the most important rule is not the return you make but how you will get out if things are going bad,
- Look at rural town residential ie Hamilton, Morrinsville, Te Awamutu etc West side of Hamilton and Ngaruawahia have good potential,
- Must have 8% Return on Investment (ROI)
- Rent must cover mortgage repayments ok if we pay for insurance and rates
- Have five year plans when doing investments
- Do not buy in rough streets, this make resale harder if you need to bail out
- Do not take out a housing corp rental contract, Apparentley these are 5 years long. I questioned that did housing corp not make sure any damages are repaired. He said yes but how do you eradicate smells that are ingrained.
- Buy 3 IP's (investment properties) as part of an investment portforlio but not more than 4.

I was also advised to buy a rental and go for an interest only loan for the first 2 years and then decide whether to do an I & P (Interest & Principal)loan after that.

Huge amounts to say...
Firstly I sort of agree with the first point, it is important to think of an exit strategy, but more important than yeild? What if the yeild is %1 then no matter how easily it maybe exited its still a poor investment decision...

Personally I see %8 as a minimum but prefer more

Again personally (Maybe because our financial situation is tighter) I won't consider a property unless it covers all outgoings including $10 a week for repairs and the Principal repayments as well... (Darn hard buying in present market though)

5 year plan = good overall life plan and strategy = better. Read Andrew Kings wonderful Planning for Property Success in NZ (Buy it from Property Talk!)

Not so concerned about rough streets, these have changed over time in Auckland and it just really means that they will stay at the bottom of the market, does mean you need a good manager but they can be high yeild.

Again not so worried by the housing corp rental, it would depend on the situation to me...

Absolutely disagree with buy only four IP's... If a strategy is successful then why not repeat it. (Whilst also diversifying with other funds...)

Absolutely disagree with interest only, having paid down principal makes your properties cheaper to hold & hopefully more profitable also makes exiting a property far less painful.

Look at it this way let us suppose that insurance and rates comes to $1500 a year.
So what your friend is recommending is that you buy an asset which you hold for 5 years on interest only and each year costs you $1500. In five years time how much will it cost you to hold? $1500!
If you are paying off the principle at least this will decline over time...
Unless you are figuring on good Capital Gains (Which given the state of the market and the areas you are looking in seems possible but implausible) I don't see whats in it for you?

What I'm questioning in other words is where you are going to make your money from...
Sorry if this seems overly harsh, just my opinion

**Rolf** · 17-01-2005, 10:37 AM

Yeah I'd also say that the rent should cover everything including rates and insurance. Those items are still expenses from having this type of investment, so they certainly reduce your ROI and should be part of the ROI calculation.

I would suggest byuing a property that needs a little do-up and then do it yourself in your spare time. I recently purchased my first IP this way and spend november on doing a complete renovation inside. It has turned out to be a nice deal, and the improvements has increased my equity as well as allowed me to set the rent higher.

I have my IP on interest only, but that is only until I have paid off my own house. I would definitely go for I&P if I didn't have a non-deductable mortgage to pay off first.

Also, there's absolutely no reason to stop at 4, it is no magic number. now I only have 1 IP for the moment, but sure I'm gonna expand as much as I can. If it's working and you get good returns and build up equity then why stop at four??

Regards,
Rolf

**AustinWong** · 17-01-2005, 11:00 AM

No worries about harshness. I need feedback thick and fast and to the point. I guess I feel a sense of urgency as I have put the best part of a year into thinking but no action.

Monid

Again personally (Maybe because our financial situation is tighter) I won't consider a property unless it covers all outgoings including $10 a week for repairs and the Principal repayments as well... (Darn hard buying in present market though)

If I spend too much time waiting in this market I may miss out all together.

I feel that if i can carry some extra costs I must better off to buy something and pay the little bit more than just waiting amd hoping.

Monid

Absolutely disagree with interest only, having paid down principal makes your properties cheaper to hold & hopefully more profitable also makes exiting a property far less painful.

I see your point, kinda what I think. In our case we will have 100% borrowing.

Monid

Unless you are figuring on good Capital Gains (Which given the state of the market and the areas you are looking in seems possible but implausible) I don't see whats in it for you?

In my mind, capital gains would be a bonus.

Monid

What I'm questioning in other words is where you are going to make your money from...

I agree

**lissie** · 17-01-2005, 01:23 PM

Austin ,
Random thoughts - no particular order:
- use a 10 year timeframe - thats how long investment cycles seem to be
- if you still owe money on your home pay it off asap - consider capitalising the interest on your IP to speed this up
- you need to work out what you want from the investment - this depends on your circumstances and the risks you are prepared to take.
ie do you need income or can you support a CG property; do you have handyman skills (or are you prepared to pay for these).
- you've said previously your wife is nervous of the overhead of tenants - suggest you factor in a good Property Manager - find them 1st talk to them about rental demand before you buy anything
- depending on the area look at getting insurance against tenants disapearing owing rent - but this will cost >$300 pa
- dont buy do ups unless you have the time to do them up - and your family wont mind you working nites on them and you dont mind loosing rent for the whole time - I find factoring in the lost rent makes paying professionals very atractive.

**KiwiinUS** · 17-01-2005, 01:53 PM

Great posting

I am pleased to see this posting and want to thank those more knowledgable for their input, as I am learning alot from reading all this information while up here in freezing Washington DC. (-freezing)

My question is shouldn't he first structure himself to protect his current assets first and set up a Limited Company in order to buy his investment properties?
Appreciate your thoughts.

**Gerrard** · 17-01-2005, 02:26 PM

If I spend too much time waiting in this market I may miss out all together.

I feel that if i can carry some extra costs I must better off to buy something and pay the little bit more than just waiting amd hoping.

Hey Austin - don't jump in just because you don't want to miss out. If that's your reason I'm sure you will live to regret it.

Jump in because you can find a deal that meets your criteria and you will be happy with for the long term.

If carrying some extra costs is acceptable within your criteria, then that is fine. But make sure this is a concious decision and you are doing it for a reason. Otherwise you might get a couple of years down the track, find the constant outflow of cash a problem (e.g. have another child, lose your job, etc), and have to exit the property. Coming off a boom time the market is likely to stay flat for some time so after all that saving and commitment to a property you might just find you have lost money.

I'm not trying to scare you off, but this is a scenario many investors have faced before. Make sure you have decided how to deal with it.

Good luck
Gerrard

**fudosan** · 17-01-2005, 05:25 PM

I'll also say "don't jump in just because you don't want to miss out". Buy only if the property meets your investment criteria.

**AustinWong** · 17-01-2005, 05:52 PM

Fudosan

I'll also say "don't jump in just because you don't want to miss out". Buy only if the property meets your investment criteria.

Thanks Gerrand and Fudosan,

I was perhaps not very clear about the jumping in bit. I will definitely make sure that the investment meets our criteria first and fore most.

I will write up some golden rules I think we will like to follow and see what you all think.

I will likely be using most of the ones posted in previous threads.

On the note of affordability and available IP's.

I need to buy with 100% borrowings. With the market today we will likely be unable to find anything that has a rental income that covers all expenses, hence the need to top up.

I am a good handyman but just have not got the time to do all of it especially will doing renovations at home and having a young family of 3 children.

Buying something that needs no work done to it does make it a wee bit harder to find something that has rent that covers all costs.

We could afford fairly comfortably an extra $50 per week to cover additional costs.

So I think maybe pay the extra if all else looks good, ie rent covers mortgage and the house is in good order, low maintenance etc.

Otherwise I could be waiting a long time and could possibly miss out. I do feel a sense of urgency but will be sensible...have read enough on this site do do so. Only, how bad is it really to have only the mortgage covered? I know it will restrict future purchase, but is this not better thtn running the rist of not be able to afford an IP?

Thanks

**Gerrard** · 17-01-2005, 08:08 PM

You've obviously got your head screwd on right Austin, so I won't go on at you too much more (just a little bit more first):

If I was paying money into a property then I would have to be confident of either:

1) good capital gains at some stage in the future
2) paying down / off the mortgage so that it started returning money to me at some stage in the future.

If you have to put in $2,500 each year for the next 25 years, will it be a worthwhile investment for you? Only you can answer that, but it's worth comparing to other options to make sure.

Cheers
Gerrard

**AustinWong** · 17-01-2005, 08:43 PM

Hi Gerrand thanks for the compliment.

Your comments on the annual payout has good merits, thanks. Please do gone on as much as you think is required i am not one to get offended too easily, especially when I am holding my cap out.

Do you calculate say no occupancy into your calculations?

Also, at the moment I just cannot see how I can buy an IP that which will cover everything.

If say I can find one it will likely be in poor order, something which I think is not too good a thing to buy. mind you if it is not in too bad an order perhaps I could pay someone to fix it up a bit and could still do ok.

What do you reckon Gerrand?

Thanks

L

**Gerrard** · 17-01-2005, 09:16 PM

Calling on all my 18 months of widsom I say it's bloody hard to find deals that cover all your expenses. It was purely by luck that I stumbled onto my properties (or was it fate

) at the time I did. Since then I've spent a lot of time looking but no buying.

A little while back I read that at this stage of the cycle you have to MAKE the deals, not FIND them. Can't say I've made any since then but it has given me a new perspective. Some of the ways I've tried to make deals happen are through:

Relationships - real etstate agents, property finders, property managers, etc

Renovations - anything from major surgery to cosmetics

Building - multiple dwellings on a section, etc (sounds like you have good knowledge to assess this kind of thing)

Circumstances - the vendor who NEEDS to sell and is prepared to do so at the right price for me. This is one is tough, but others like Graeme Fowler seem to have the knack.

There are still good deals out there. I'm just looking for a great one!

Gerrard

**AustinWong** · 17-01-2005, 09:24 PM

Hi Gerrand you say that there are good deals out there but are looking for the great one.

Can you give me an example on what you call a good deal? Perhaps by using a real scenario? I don't need to know where the property is excatly, but a region would be good if it is relevant to your calculations working (ie projected capital gains)

I just need the maths to look at.

Thanks

Lawrence

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