Richmastery $1000 R&M - Hybrid $1000 R&M

[Maverick]

Hello all

I was supposed to be working on our website tonight but I got slightly (completely) sidetracked by 'SUPERDADS' frustration with Richmastery advertising repairs and maintenance at $1000. Here's a story for you...

My name is Ammon Acarapi and I am a shareholder and director of a specialist Minor Dwelling company called FUZO with fellow shareholders David Whitburn and PHIL JONES.

The first Minor Dwelling company which I started, and was also the managing director of was a company called Hybrid Minor Dwellings, with again David Whitburn, and the third shareholder and director of this company was one KIERAN TRASS.

So I have had the privilege of experiencing, being a part of and contributing to both the operations and cultures of these great companies. I have also had the privilege of being in business with two of New Zealand’s- if not the two most well known investment property service providers - business owners Phil Jones and Kieran Trass.

And while I am certainly not an experienced PT'er (my last visit to this site was apparently on the 7th of May) I do understand that there is a perceived or an actual - call it what you may - difference in the property investment advice and business 'ideologies/ strategies' of these two companies.

Well from my personal experience there are differences - but the major differences are mainly in the operations/effectiveness of these two business, rather than differences in 'fundamental' investment advice i.e. the key fundamentals of property investing that lead to success have to be the same, it doesn't matter who's mouth it may come from. But the presentation of this information has a massive impact on its effectiveness to the listener.

I arrived in Auckland from Hamilton in 2001 as a novice property investor to take up the position of Property Consultant (I was Kieran’s 3rd ever property consultant i.e. it was pretty early in the piece), I was personally trained by Kieran to be an 'expert' property coach/advisor/consultant to help grow Kieran’s new Coaching Business by acquiring and coaching clients for a period of either 6 months or 12 months. At one stage I was personally coaching approximately 40 - 50 clients (hello to those of you who are reading this, please send me an email).

The coaching service which we offered involved an initial 3 hour one on one consultation with the client and myself - Kieran would quite often come and contribute for about half an hour or so. One of the key components of this consultation was to educate clients how to analyse individual investment properties, how to compare one with another i.e. so they where comparing apples with apples and understand how this property would effect their portfolio and borrowing position.

Part of the service offered was then to analyse properties that clients where considering to buy, by going over templates which we had taught them to fill out.

So here is the thing, there was obviously a figure for R&M that had to be used to be able to analyse/ compare these deals, and the other coaches and myself were taught by Kieran to teach our clients the following:

New Properties i.e.(up to 7 yrs old): $500 R&M per annum
Old Properties i.e.(over 7yrs old): $1,000 R&M per annum

Yes this was debated in the office, but this was the policy, these were the figures that we were to use to educate our clients with to go and make investment decisions off. And if you are on the Hybrid database and have received any of Hybrid's property deals over the past few years you should see this clearly for yourself.

Now I am not trying to point the finger, as I still do use these figures for my own personal investment analysis i.e. $1,000 for the house at the front and $500 for the Minor Dwelling and as a rule of thumb it is working well. Of course you will get red hearings i.e. water cylinder, kitchen, repaint but these costs average out over the long term, by which time incidentals would usually become upgrades to the properties.

But just to prove that Richmastery aren't the only 'bad' ones using this analysing technique - and Hybrid the 'OTHERSIDE' are also, wouldn't it prove good reading to read KIERAN'S reply to:

"How do I get my R&M done for $1,000 per annum?".

So what do you say KIERAN...

"How do I get my R&M done for $1,000 per annum?".


Now this could really improve the effectiveness and efficiency of 'superdads' own portfolio growth. Superdad could attract another high profile investor to vent his R&M frustrations with - he could be hitting two ‘big’ birds with the one stone!!!

[Jumpin]

lol Great post ha haha.
So your motivation for the post is to deflect some heat from RM to a competitor?
Actually I have often wondered why RM are a such a target by certain posters, when their activities differ little from many others. I have come to the conclusion that it is because they are out there, big, bold and brash. It's their style, and it doesn't suit some of the more 'steady as she goes' crowd.
At the end of the day R&M varies so much you just can't predict.
I had a nice 1970s brick and tile place with the same tenant for 5 years. Very low wear and tear. Annual maintenance - averaged out at around $250. And it didnt need a lot doing before the next person moved in. Unusual? Maybe, but that's what it was.
Buy a boarding house and it won't be the same, sure, but how much will it be? Who knows. The fact is if you get the education you will know that a random number generator will be just as accurate as any guess you put in a spreadsheet. Same as guessing how many weeks a year unoccupied, or rent increases, cap growth in a given period. It's all speculation. All you can do is reduce the risks and buy another one.
Happy investing

Tim

[Muffin]

I think it is only fair that when RM finally answer the question, that Kieran is made to do the same.

[xris]

lol Great post ha haha.
So your motivation for the post is to deflect some heat from RM to a competitor?
Actually I have often wondered why RM are a such a target by certain posters, when their activities differ little from many others. I have come to the conclusion that it is because they are out there, big, bold and brash. It's their style, and it doesn't suit some of the more 'steady as she goes' crowd.
At the end of the day R&M varies so much you just can't predict.
I had a nice 1970s brick and tile place with the same tenant for 5 years. Very low wear and tear. Annual maintenance - averaged out at around $250. And it didnt need a lot doing before the next person moved in. Unusual? Maybe, but that's what it was.
Buy a boarding house and it won't be the same, sure, but how much will it be? Who knows. The fact is if you get the education you will know that a random number generator will be just as accurate as any guess you put in a spreadsheet. Same as guessing how many weeks a year unoccupied, or rent increases, cap growth in a given period. It's all speculation. All you can do is reduce the risks and buy another one.
Happy investing

Tim

Hello Tim,

A good post, and I would agree with most of it.

However, I believe you are falling into the same trap that many other people fall into, including RM and KT and many many other landlords.

To spend $250 per annum over five years on a 1970's house is not at all unusual, especially if you have the same tenant there throughout. And when that tenant leaves it is also not at all unusual to spend only a couple of hundred dollars on a spruce up and then easily put another tenant in.

This though is very typical example of what not to do.

At some point - it may not arise for another five or even ten years - you will be faced with a major maintenance bill. You could choose not to spend that money but then your property will be a different type of property attracting different tenants and requiring greater on-going maintenance.

It has happened to me a few times now and I have seen it happen to other landlords. Two of mine stick in my mind as good examples of this.

Both owned for around fifteen years. The first has had minimal spent on it ($100-$300 each year). The other has had around $1,000-$1,200 spend on it each year and has also had some 'meaty' maintenance spent on several occassions, (eg, new carpet, major tree/gardening work, new fences, internal paint job etc). This has brought the annual maintenace up to?..I don't know but probably $3-4,000.

How do the two properties differ? The second is still attracting good tenants paying market rent and has maintained its market value. The second is so far gone I can only charge low rent and to bring it back up top scratch I wil need to spend, well, who knows?..Perhaps $20-30,000. This is money I should have been spending on an annual basis, like with the other example.

And what about the other property I recently spoke about on this site? Bought ten years ago in quite good condition. Got good tenants at market rent but spent little on it. Slowly but surely the ogre called defered maintenance was quietly watching and waiting to pounce. Long term tenants left a couple of months ago and...oops! Unrentable in its then condition to anyone except low quality tenants. Result? I rapidly had to bring it up to a passable standard. After six weeks, a lot of my time, and several thousand dollars, new tenants moved in. Averaged out over the ten years of ownership the maintenance budget now stands at around $2,500 per annum - still too low, but closer to reality. If you had asked my a tear ago what that house was costing me I would have said $2-300 per annum.

I can guarantee that there are many, many more stories loke this from long term landlords.

I have said before, and I will keep repeating it, if you plan to hold long term you must budget for realistic maintenance costs. You won't spend that each year, but one day you will need it and if you have not put it safely away to one side then the cost incurred will hit you hard.

xris

[Jumpin]

xris,
I feel I must defer to your greater experience. And indeed cashflow is all important.
However if maintenance kills the deal, then it maybe wasnt such a good deal. For B&H, depreciation funds maintenance anyhow. (in the early years), later on rent increases will probably cover the shortfall. (I guess you need to be a taxpayer to get full benefit).
So the question is what do you do with your tax refund? The astute investor will spend it on maintenance, (unless they havent already put it towards a deposit on a CF+ condo in Vegas).

Cheers
Tim

[Maverick]

Is that really R&M???

Is repainting, recarpeting, adding a carport or a fence R&M?

I have just yesterday finished repainting the inside and outside, recarperting and lino'ing an IP. The proeprty didn't really need it, I had tenants who where going to move in as is for $320, so what was my reason for doing this then?

To pull more equity out of it so I can buy another property.

The R&M/reno will have cost me about $7.5k but my current mortgage on the property is $208k (80% of $260k) and I think I will be able to increase my mortgage to $248k (80% of $310k).

So I spent $7.5k but pulled out $40k. So for every dollar I have spent I have made 5.33 dollars. Not bad aye Kieran thanks for teaching me this one i.e. must make at least $2 for every dollar spent.

If you base your analysis/ investment decision making of properties on saving cents (i.e. R&M) then you WILL miss the dollars. Thanks for teaching me this one Phil i.e. Educate yourself, think big and go hard.

[David_W]

Wise words Ammon - It simply doesn't make sense to save cents, but miss out on the dollars. The biggest failure I see amongst many investors is that they suffer from paralysis by anlysis, and as result they convince themselves why not to do deals.

Get educated so you do research on deals very fast. Then you know you to judge a deal. If it is a deal - take it, before a serious investor does. At the cutting edge of the market sometimes you only have 3 minutes advantage over the next purchaser (who may not be a good a negotiator as you and may pay more, or offer better terms) - take action.

Grats on another super deal Ammon, with the Fuzo minor dwelling you will further add tens of thousands extra equity - you are truly one of this year's investor success stories!

[whitt]

Ammon.

Thank you for a perspective on the R&M issue.

I will try give a summary of your post and the various threads to date as I think the conclusion to this issue has been touched on several times.

Yes RM have copped most the flak from several users.
(I must admit until recently they have defended there stance so this could be a reason.)

I agree that the issue is not limited to just one company but some property finders in general.

A clearer understanding months ago on how figures are derived could have gone along way.

Some finders give no R&M allowance and leave it up to the investor. Others have a set amount for older or newer property.


*Repairs (R)on some property can be a low figure eg $1k P.A
*Whilst the Maintenance (M) can be high some years and non-existent others. Depends if you need to replace roof, paint etc..

The total sum on average for both repairs and maintenance as backed by BRANZ is $3500- 4000.

To satisfy most investors figures should be:
*Not misleading
*Are reasonable
*Clearly show how they are derived. Eg Does it include repairs and/or an allowance for deferred maintenance?


I think most finders only showing repair totals and do not include the maintenance as this can sometimes be deferred. However the novice investor assumes the figure is both.

[Gerrard]

Is repainting, recarpeting, adding a carport or a fence R&M?

Hi Ammon. Good point which hasn't really been debated in depth yet.

I'm not going to start that debate yet. What I will point out is that the $7.5k you mentioned has to come from somewhere. So what do you do:
- borrow more?
- put the cash in yourself?
- do it from a good size R&M budget you maintain for the property?

Actually I don't need a specific answer. What I'm pointing out is that the $7.5k has to come from somewhere so it must affect you personal cash holding or your business cashflow in some way.

Sure you have gained $40k in value out of doing it, but that value will be erroded over time as the property falls into disrepari again, and any increase you got in the rent will also do the same.


It doesn't matter how you account for it, the cash has to come from somewhere and it therefore does affect your cashflow to a tume of more than $500 or $1000 a year. I am yet to see anyone who can prove otherwise.

Gerrard

[xris]

Dear Messrs Acrapi and Whitburn,

Is repainting, recarpeting, adding a carport or a fence R&M?

Recarpeting – it depends
Adding a carport or fence (not mentioned by me) – probably not, rather a capital improvement as with anything else added.
Replacing a old fence – depends

You have opened up a new debate about the correct way to claim expenses on work done on and to a property. The topic is worthy of debate but is too large and detailed to go into here. An accountant’s input here would also be useful.

However, a brief and very general overview of the principal involved may be in order for those who are confused or do not understand.

You should only claim as an expense the money spent returning a property to ots original condition when purchased.

If you spend money which adds value to the property above its value on purchase then that is a capital improvement and you cannot claim that money as a directly deductible expense. Instead you need to claim its depreciation sum on an annual basis.

For example, if you buy a property without a front gate and then shortly afterwards you install a $1,000 iron gate, then you should not claim that as a $1,000 expense to offset your annual income. You need to depreciate it and claim that sum instead. Thus rather than taking $1,000 off the rental income in that year you should take off $100, and then do the same the next year, and so on for ten years (assuming a s/l rate of 10%.) A slight bookkeeping nuisance but that’s the way to do it.

Grey areas arise with such things as carpets and ovens, new replacement fences and so on, because any new thing installed is likely to be an improvement on what was originally there unless what was originally there was new itself. As I said early, this is a large topic worthy of further debate, preferably with some professional accounting input.

But, on the whole, the sort of r&m work discussed here falls into the category of directly deductible expenses and is therefore r&m, not capital improvement.

I have just yesterday finished repainting the inside and outside, recarpeting and lino'ing an IP. The proeprty didn't really need it, I had tenants who where going to move in as is for $320, so what was my reason for doing this then?

R&M? No
A capital improvement? Yes.

………………………………….

This leads on to another point, a particular favourite of mine, namely misused terminology. This topic of r&m relates primarily to investors.

An investor is someone who buys property and holds it long term, benefiting from the slow capital appreciation of that asset. As he holds it long term necessary r&m will be required to keep it to its original standard. That is an investor.

A trader or developer operates quite differently and is quite rightly treated differently be the ird. A trader might buy a run down dump, spend $40,000 improving it, and then resell for a profit. None of that expense is a maintenance expense. If held for a year or two it might be claimed as depreciation, but not maintenance.

A developer is clearly not an investor either – he is a developer.

My problem so often is that a whole group of people who are in a business that has a link with property in some way or another, call themselves investors. It is a wonderful con really because lots of people who know no better actually believe it. Sometimes these people even believe it themselves.

FUZO is a perfect example of this deception.

Gentlemen, in your role as directors of FUZO you are developers. You are not property investors! So please stop trying to pretend you are, and at the same time trying to put down the very many people viewing this site who are investors and who are interested in the issues relating to investing.

Wise words Ammon - It simply doesn't make sense to save cents, but miss out on the dollars. The biggest failure I see amongst many investors is that they suffer from paralysis by anlysis, and as result they convince themselves why not to do deals.


Incidentally, I believe your thinly veiled attempts at condescending put downs of investors discussing pots of paint and second hand bench tops does you no favours.

I can quite easily imagine people like Graham Hart telling you not to get bogged down in the thousands but instead to think big and only consider dealing in the millions. Different subjects require different thinking. So please do not try hijacking the topic of property investment. By all means contribute in your field of property development, an area where you no doubt have a lot of good advice to offer, but don’t allocate the rules of developing to the rules of investing. RM and a few others try to do that and to an extent they have a degree of success. You only have to look at the successful property traders like pooomba/Dean Leftus and see how he so often refers to himself as an investor, to see how far this fuzziness of meaning has gone, (no pun intended).

It is quite possible to be all at the same time – and investor, developer, and trader. But these different areas must be quite separate (less so perhaps developing and trading, although I believe it may be wise to keep them quite separate even if the ird does not think it is necessary).

xris

[xris]

Gerrard,

One idea might be as follows.

Buy a property for $300,000.

Assess it needs $20,000 spend on it quickly and borrow that as well - say borrow $320,000.

Spend that money on immediate tlc and then thae newly done up property which has cost $320,000 becomes your starting point. Depreciate from there and put aside you annual r&m money, which will be less than it would otherwise have been because so much had been put in at the start. Then, hen the next big r&m is needed you have some money set aside.

Yes, you still have to pay for it, but the affect on your cash flow is mainly the interest on the initial extra borrowing, not on the total expense directly out of your pocket.

A mild comfort perhaps, but a comfort nevertheless.

xris

[Jumpin]

Is repainting, recarpeting, adding a carport or a fence R&M?

I have just yesterday finished repainting the inside and outside, recarperting and lino'ing an IP. The proeprty didn't really need it, I had tenants who where going to move in as is for $320, so what was my reason for doing this then?

To pull more equity out of it so I can buy another property.

The R&M/reno will have cost me about $7.5k but my current mortgage on the property is $208k (80% of $260k) and I think I will be able to increase my mortgage to $248k (80% of $310k).

So I spent $7.5k but pulled out $40k. So for every dollar I have spent I have made 5.33 dollars. Not bad aye Kieran thanks for teaching me this one i.e. must make at least $2 for every dollar spent.

If you base your analysis/ investment decision making of properties on saving cents (i.e. R&M) then you WILL miss the dollars. Thanks for teaching me this one Phil i.e. Educate yourself, think big and go hard.

Ammon,
nice work (I think). So in this example you are not a developer as such, you are an investor in xris' definition I guess. ie you have not sold the property, but pulled out the increased equity. However, the property is far from CF+, and unless the improvements increase the rent, you have not improved your serivceability.
The bank may like your improved LVR, but you are not really better off, unless your new purchase is a major cash cow. I'm still learning so I would appreciate your angle on this.
Thanks
Tim

[Maverick]

What am I going to do with this property?

Mr Xrix

Mr Acarapi not Acrapi replying.

I actually have no intention of selling this particular property. I carried out this renovation to increase the value of the property to pull out most of my deposit, and use this money to put towards the development costs of doing a minor dwelling i.e. surveyor, architect, council fees and the leftover money towards the deposit on the next property.

The bank will lend me 100% of the money to build the MD because the increase in valuation as a result of building the MD is greater the fixed price building contract.

Once the project is complete and I am getting a combined rental of say $650, the project will have cost about $420,000 and yield 8%, which for me at the moment is a keeper. (The valuation of this project at completion I would anticipate to be about $490,000.)

So Xris I guess this would make this an investment property, and me a property investor.

But yes you are right Xris, the $7,500 is therefore not R&M and not to be expensed but rather capitalised and depreciated. And also the chattels valuation I get is to be based on the properties condition when I purchased it i.e. the old carpet value is to be valued rather than new carpet value.

So I failed to make my point clear with my previous post. He here goes again. (BTW – This is only a side issue to the main one here of - Richmastery RM $1,000 - Hybrid RM $1,000)

A lot of the money investors spend on what they consider R&M I consider should/could be classified as improvements and will add usable equity/ add value to their net worth, and also should/could increase the rent i.e. painting the property, replacing the carpet vinyl.

But yes many R&M costs will not add not one cent to the value or induce a claim for a rental increase I agree e.g. cleaning out the leaves from the gutter, re-piling, tightening door handles, paying for window to be re-shashed...

Anyway...here is something else I was just thinking about to add to the main topic of this thread of $1,000 R&M.

Hybrid wasn't the first place I was introduced to this figure of $1,000 per annum for R&M, and it wasn't from another property finder either. It was rather when I was at University and working as a Mortgage Broker/ Investment Property salesman for a development company selling brand new properties off the plans.

You know the types NZ Invest etc... Maybe $1,000 R&M is just an industry norm, and the invitation and recommendation to do your own due diligence on the properties Hybrid and Richmastery offer, and all the extra information i.e. registered valuations and rental assessments which they provide us with to make our own informed decision should be viewed as Hybrid and Richmastery giving us more credit than the average unsophisticated investor getting a very negatively geared property at a retail price presented onto them.

What do you say Kieran, and anyone else interested in discussing?

[Maverick]

Hi Gerrard

I paid the painter yesterday out of my holding companies R/C account (he likes getting paid straight away), and I will hold off paying the carpet layers until the 20th of the month following as per our trade agreement (cashflow), in which time I will be revaluing the property to pull out most of the deposit (progress valuation booked in for Monday, bank expecting this on Tuesday, fingers crossed money in my account Wednesday). This will obviously then replenish the R/C of the painting costs and I will pay the carpet guys on the 20th of December.

Yes this $7,500 is a real cost and does effect my cashflow/ usable capital. We all have limited resource levels even Graham Hart. Some obviously have higher levels of resource than others.

I operate two R/C accounts, one for my trading company and one for my holding company. These funds are used to acquire properties which can take a minor dwelling on them mostly (surprise, surprise).

While at Hybrid Minor Dwellings I only ever developed one minor dwelling for myself in 12 months. But after being at my first Richmastery academy (one which I was speaking at) I have either developed or am in the process of developing 11 minor dwellings for myself in the past 18 odd months.

A funny but life changing story really, at this academy I was sitting at the back of the room not really to sure what I was making of the whole thing. I was sitting next to another of the presenters Martin Ayles, a cocky little developer from Australia with a wicked sense of humour (he's now a very good mate so I can call him that), and we immediately started chatting about our business model of finding and developing minor dwelling deals for clients and how well it was going for our clients and ourselves. I had only really being speaking to him for say 10mins max about the model thinking he was getting really impressed, when stopped me mid sentence and said "so you build a MD for this right, and sell it for that right," I agreed, and he then said "and the client makes this!!!, mate you're a bloody idiot".

We worked out that David and I are the busiest most proactive Builders he had ever met. And our clients were the lucky developers.

See… we were only making a builders margin and the client, rightly so I must add, was making the developers margin as they were buying the property and paying for the MD.

A builders margin is usually about 10% of the value of the building contract.

A developer’s margin is usually about 10 - 15% of the value of the entire project.
(Note: on bigger developments like land developments developer will be after a much higher level of return due to the larger risks and investments associated).

It wasn't rocket science. I needed to be developing the odd Minor Dwelling for myself, if I could find the resource to fund them.

I had all the natural sef-doubt barriers to break through of, I would be lucky to be able to fund one minor dwelling development per year:

- I am self employed the banks will give me a much harder time,
- I have three kids (doodad's financially yeah, love them to bits though) stay at home wife, what a hiding to my DSR they will give,
- student loan

I had a lot of what I considered to be real reasons why I couldn't develop numerous MD's for myself. Remember I was a mortgage broker, property consultant, minor dwelling expert, but I didn’t think I had the answers.

But at the academy I meet people who had brought numerous properties in a short period of time with limited resource. I can't say I learn't to much new property investing fundament's, I consider to have already of learn't these at Hybrid, but the educating techniques, material presentation and quality of the education was something that I hadn't seen before.

It was actually the "ra,ra" at the academy, that was lacking in past environments which I had associated myself in that gave me the determination to aggressively purse answers that would enable my own portfolio growth and success.

So anyway David and I ended up going to stay with Martin in Adelaide for a couple of days and see his operation. He had numerous developments under construction, but he didn't teach me anything new about building houses, but he did teach me his developing key success factors, how to raise development finance, how to manage development finance and how to educate brokers/bankers about what you are trying to achieve. But most importantly he taught me self-belief strategies. (He has written a great book "You need a rocket," basically his own story and some tips on personal development that will help put you in the right head space.

The rest they say is history, initially I had to do joint ventures to get all the money to do the developments, and I still do some joint ventures.

So far I have been able to keep 50% of the MD developments I have done thus far. I hope I can keep all of these, but sometimes you need to take one step back to take two forward.

Hi Jumpin

What I do is create positive cashflow by developing/creating multiple income streams, the ultimate home and income i.e. architecturally designed three bedroom MD/townhouses which rent for as much as the house at the front. I do the development so it looks like it has being fully subdivided as possible i.e. fencing, separate driveways. These developments give me a yield of say 7 - 8% - maybe neutrally geared.

But to get these developments into positive cashflow territory I create cash flow by reducing debt. I sell off some of the developments and with the profit I reduce the debt on the properties I am holding.

Yes it is quite painful to have to sell (so much tax), I am trying to get as much calculated exposure to market as possible, because the equity the market gives me will be a heck of a lot easier to have acquired than the stuff I had to create.

[The_Dog]

......Not bad aye Kieran thanks for teaching me this one i.e. must make at least $2 for every dollar spent.

.......Thanks for teaching me this one Phil i.e. Educate yourself, think big and go hard.

Maverick,

Perhaps you can start writing a series of books called "Analytical Dad, Pushy Dad"; colour them purple and sell them across the world.

I must admire ALL contributors to this thread as you have far more stamina and stomach than I could dream of. Personally, I had a guts full of the "how much for maintenance" debate WEEKS ago. But, still, you seem to breathe new life into a rotting corpse, albeit for the purposes of self promotion.

Please try not to clutter up the forum rehashing old ground with personal agendas. I feel the forum has suffered over recent months because the input has lost the independence. Admittedly this is not the fault of the forum, but rather of the contributors. The runners of the forum have been forced to 'police' content instead of getting on with the job of supporting and educating the investment community.

Just an opinion....

The Dog