Relying on Capital Gains

[GLin]

House hunter - appreciate your post. I believe there are a lot in your position. It rather easy to flash the gains card and entice unsuspecting students - your story clearly demonstrates the way scenario.

Gary , is it fair to say there will be a lot of people who will get burned following Ron and your strategy which was to buy in quote "

leafy suburbs for capital gain" . Your were quoted many times as "

The capital gains investor, investing in good area’s in Auckland – leafy suburbs."

What is your average yield now Gary across your portfolio? 6 %? what if interest rate shoots up to 7%.
Because of your strategy of buying for capital gains, this would have limited your ability to borrow more, with AK prices expected to go side ways if not down, has your strategy changed since then to go outside of Auckland?

I haven't been part of Ron's group for over a year now so I won't know.

With the friends that I connect with who are still part of the group, there aren't anyone that I know got burnt that I am aware off.

My net cashflow is $80k/year, and I have no mortgages on my own home, so if interest rate shoots up to 7%? I just go get a job in the council perhaps haha!

There will be many businesses and property investors developers go bankrupt if interest rate goes up to 7%.

If you understand how the economy, Federal Reserve works, interest rates will never go up to that. Many people still believe interest rates will go to 7%, 20% etc. If that happens, you got more things to worry about than the health of my portfolio!

[Don't believe the Hype]

If you understand how the economy, Federal Reserve works, interest rates will never go up to that. Many people still believe interest rates will go to 7%, 20% etc. If that happens, you got more things to worry about than the health of my portfolio![/LEFT]

Let’s say we don’t know how the economy, Federal Reserve works... how about a quick explanation?

[Don't believe the Hype]

I joined up with Ron Hoy Fong's Ronovationz group (Gary's mentor) approximately 3.5 years ago.

I was a 26 year old single income earner, had a 65k salary and a 140k deposit from splitting from my previous partner. I paid 12k to join the group and was advised to find a one or two bedroom property in central Auckland and covert it into two or three bedrooms by moving the kitchen and lounge around.

So I bought a 630k property, spent around 40k doing it all up, got some tenants in and was on my way to becoming rich. Central Auckland just booms non stop I was told. So many Chinese buying up and immigrants always move into Auckland. South Auckland purchasing with higher yields you were criticized in the group for being so foolish and Ron said many times investing outside of Auckland was the stupidest thing you could possibly do. I was asked by many other people in the group when I was going to buy my next property. I must have made huge capital gains doing my renovation right? Not quite. Buying at a lowish 4% yield and not having a 100k+ salary or endless cash burning a hole in my pocket I was completely boxed into a hole. I brought up in our weeknight "mastermind" sessions for a couple of weeks in a row and talked to my "mentor" on the phone about the precarious position I found myself in and wondered why the loan servicing was never explained to me at all by my mentor. I left the group after 6 months and have never been allowed back after I started questioning the investment strategy rather than simply following the capital gains trumps all advice that was given.

So my 630k property in Ellerslie (two bedroom converted to three) is valued around 750k now. I've put in 670k for the purchase price and reonvations (including holding costs during that time) and I've had to top it up around 11-12k each year x 3.5 years = $40.5k. Note this is at record low interest rates.

My fixed term tenancy comes up in the next several months and I will sell this year. After agents fees I've walked away with putting 180k plus into the property and going to walk away with at best 20k profit. Would have been better to just put it into a term deposit without the hassle.

So in summary, buying for capital gains only really works if you are on a massive salary and can afford shortfalls of several properties, do trading/speculating on the side or have deep pockets and are simply looking for somewhere to just park your money and appreciate over time. Definitely wouldn't go down this route again. Looking to buy into higher yielding properties outside of Auckland when I cash up.

Interesting to see Gary's advice starting to deviate from buying central Auckland. Perhaps many other members are asking the questions I did 3 years ago? And they are listening?

I note Gary's original Mt Wellington purchases were 8-9% yields which likely topped up his more recent 4-5% yield purchases.

this is exactly why I have tried to call out the risks to this bullish strategy that Gary was peddeling here and broadly.

Househunter - you’re lucky to get out without any real damage. So be thankful for that. You hopefully learned something that will help you with your investing going forward.

its funny how people who were spruking Ronovations as the guru now distance themselves from the strategy.

As they say... ‘success has a thousand fathers, failure is an orphan’

HH - from the outside Auckland crowd... here in Porirua in 2015 I bought 10 or so houses... on 9-10% gross. They’ve all more or less doubled in value on paper and the yields have softened to around 7% gross... With the shortage of rentals in Porirua I would’t be surprised if yields improved this year.

[YadwinderKaushal]

I am totally agree with your reply. Without capital gains, properties that don't grow in value simply depreciate over time due to inflation.

Any investor will require BOTH capital gains AND cashflow.

The name of the game is leverage.

Without positive, good cashflow and good income, investors won't be able to grow their property portfolios.

Without capital gains, properties that don't grow in value simply depreciate over time due to inflation. Properties that grow too slow in capital value, also make investor suffer due to opportunity cost.

[House Hunter]

Where did you get the $750k valuation for your 3 bedroom in Ellerslie?
Were the alterations signed off?
How much rent are you receiving?
Are you paying principal and interest?

Online valuations, recent sales and talking to two realestate agents recently.

$580 per week rent.

No can’t afford to. Interest only.

[House Hunter]

Househunter - you’re lucky to get out without any real damage. So be thankful for that. You hopefully learned something that will help you with your investing going forward.

Haven’t sold it yet tenancy ends in July so we will see how I get on.

But yes the more I learn and talk to veterans in the property investors association meetings, it’s all about desireable to tenants, low maintenance properties, with 9+% yields on purchase just rinse and repeat and capital gains are a nice little bonus.

No one ever went bankrupt with too much cashflow but many people have chasing a quick buck hoping the price goes up.

Was a great lesson glad I leant it in my 20s not in my 50s.

[Don't believe the Hype]

Your 20’s are for learning your 30’s are for earning...

[GLin]

Let’s say we don’t know how the economy, Federal Reserve works... how about a quick explanation?

[GLin]

If there is no capital gains.

Let's just say buy with cash.

9% gross yield in small town.

5.2 to 5.5%ish net yield, after expenses (small towns have very high council rates)

33% tax

3.7%, with no compounding...

Might as well invest in a Vanguard index fund that averages 9% gross return and 0.4% fees

[DaveW]

Online valuations, recent sales and talking to two realestate agents recently.

$580 per week rent.

No can’t afford to. Interest only.

If you check trademe I think you will find there is not much in the way of 3 bedrooms for sale in Ellerslie. I would suggest not listening to an agent at this stage and just put it up for private sale by tender or auction, Now, rather than waiting for the winter months and have no rent income - that means up will be topping it up by $3,500 every month.

If your alterations are not signed off then that could prove to be problem.

[AlFa]

If your alterations are not signed off then that could prove to be problem.

Not all alterations require "sign off". In fact if BC was required but not applied for there can't be a "sign off" at all.
But we don't know extent of work HH completed, don't we?

[DaveW]

Not all alterations require "sign off". In fact if BC was required but not applied for there can't be a "sign off" at all.
But we don't know extent of work HH completed, don't we?

correct AlFa. So it needs to be checked.

From what I gathered a kitchen was moved (plumbing) to make way for an additional bedroom.

[GLin]

correct AlFa. So it needs to be checked.

From what I gathered a kitchen was moved (plumbing) to make way for an additional bedroom.

What building work usually doesn't require a building consent and can be carried out by anyone:

https://www.building.govt.nz/projects-and-consents/planning-a-successful-build/scope-and-design/check-if-you-need-consents/building-consent-exemptions-for-low-risk-work/schedule-1-guidance/part-1-exempted-building-work/

[AlFa]

Although good on you for posting a link in case people don't know how to use Google but please don't say "by anyone". Any new building work must comply with Building Code and "anyone" won't be capable of archiving this requirement.

[DaveW]

What building work usually doesn't require a building consent and can be carried out by anyone:
https://www.building.govt.nz/project...building-work/

I would be surprised if changing a kitchen location was on that list. But either way it's best to get it clarified. I'm no builder or council person but I do know potential buyers will notice a change in floor plan and you don't want it jeopardizing a sale.