Investing in Hamilton? what's your thoughts?

[Chelsea]

I know Hamilton property value rises probably 20%-30% between 2015 - 2018 , some people might think it's over-valued.
Most of properties in North area e.g. Rotutuna, Hunting with 4 bedroom all sits in 750k-850k, but in considering it's location to AKL, it might still has huge potential in long term? your thoughts?

[Rosco]

What is the rent, Gross Yield and overall cashflow?

Is there some kind of added value, like subdivision, minor dwelling etc?

What is your long term plan?
- speculation to get cash
- passive income
- buy two, hope for capital gain, sell one so that other is debt free


Generally the cashflow is terrible, and I would wonder why you would even look at these as investments, unless some other added value opportunity that you haven't mentioned.


Ross

[GLin]

Not easy to find high yielding properties.

I helped two students bought two properties last two months. One 7% gross yield, the other 6% gross yield but is being subdivided to add $200k equity.

[Chelsea]

Thanks Ross, the purpose is really for capital gain in long term.
Cashflow will end up in negative, in considering new properties (4 bedroom) in Huntington/Rototuna will be around $750k-800k, with average rent around $580-$620. so I will be in a loss position for $10k, be able to claim $3k back, still end up with $7k loss, which is okay with my current financial position.
It's more the long term potential in Hamilton that I'd be interested.

[Chelsea]

do they all buy in Hamilton or other cities? 7% gross yield is a very good number, I'd think this is unachievable in Auckland?

[Don't believe the Hype]

have you hear of ring fencing of property? Where will you claim that $3k back? Do you have other cash flow positive properties to off set agains?

[Rosco]

Thanks Ross, the purpose is really for capital gain in long term.
Cashflow will end up in negative, in considering new properties (4 bedroom) in Huntington/Rototuna will be around $750k-800k, with average rent around $580-$620. so I will be in a loss position for $10k, be able to claim $3k back, still end up with $7k loss, which is okay with my current financial position.
It's more the long term potential in Hamilton that I'd be interested.

$10k is a HUGE loss when interest rates are 4%. So over the next 5 years you need the property to go up at least $50k just to break even! That is a big gamble on capital gains in uncertain times. If you went ahead, I would want to have a 5 year plan on how the big loss would be turned at least neutral.

As mentioned by someone else above, expecting ring fencing 1/4/19, so no $3k refund!


I would really review your strategy. It is possible it can work, but I think there are a lot better strategies out there. I would start buy signing up to properties being sold by ifindproperty, so that you see examples of what properties can have better yields and often have equity gains too. Not saying you should or shouldn't buy these, but they do give you good examples. If you did buy one, as with all properties you need to do your full due diligence yourself.

Ross

[Chelsea]

have you hear of ring fencing of property? Where will you claim that $3k back? Do you have other cash flow positive properties to off set agains?

yes heard of loss ring fencing but didn't pay much of attention as thought it won't pass, but look like it's going to?
I do have other cash flow positive properties to offset the loss but won't be able to fully offsets, however I believe the loss can be accumulated to offset further rental income, I estimate my rent portfolio will be cashflow positive in year 3 or 4.

[Chelsea]

yes agree it's a huge loss but in 3 years I should be able to turn the loss into gain.
on a yearly basis I should be able to repay the loan by $100k (outside of monthly mortgage pmt and without compromising my living standard) so technical in year 3 the rental property should be able to turn into positive cashflow (if interest remains around 4%).
Thanks for the advice and concerns, not an easy decision to invest huge amount of money in current market.

[Rosco]

Hi Chelsea,

Great to see you have a 3 year plan to turn it around, and if you can pay of that amount of debt each year, any plan will work!

Back to your original question - If I was to gamble on capital gains, I would gamble in Auckland. Ideally with something that can be subdivided long term. In the past Auckland has always jumped in value first and then other regions have followed. So much of NZ immigration goes to Auckland and it appears to be getting bigger and bigger all the time. Plus Auckland is constantly mentioned as having a housing shortage.

Hamilton - generally follows Auckland. It has been reasonable flat since November 16, with sales in Rototuna and other Northern suburbs moving the median up, but that doesn't necessarily mean that house prices in Hamilton are going up! Just more are being sold in the North! Hamilton has jumped hugely in value, like most of NZ.

Long term - if you do gamble on capital gains, make sure you are in it for the long term. 2-3 years is a big guessing game, over 10 or more years, most areas are likely to go up.


I would really think about your end goal - what is it you want and when? ie do you want $150k passive income in 10 years? Then look at your strategy and will you achieve this goal? And also at the end of 10 years what will your portfolio look like? ie do you want 10 very old houses, or 10 newish houses?

Presuming you are time poor, a possible strategy could be to buy cheaper, new properties, in a variety of areas. These would be closer to cashflow neutral.
- rapidly pay down debt by the $100k you suggest
- plus as better cashflow, could pay down more
- After one year could probably turn into cashflow neutral or positive


Or my preferred approach - buy something where you can subdivide and build one or two new houses on the back
- likely to add $100k to $200k equity
- likely to be neutral or better cashflow when done, with no money in. So if you aggressively paid down debt would quickly create passive income.
- Long term potentially could sell the older house (get tax advice), so left with one or two new houses.
- If time poor, pay a fee to a property finder.

Ross

[Don't believe the Hype]

Hi Chelsea,

Back to your original question - If I was to gamble on capital gains, I would gamble in Auckland. Ideally with something that can be subdivided long term. In the past Auckland has always jumped in value first and then other regions have followed. So much of NZ immigration goes to Auckland and it appears to be getting bigger and bigger all the time. Plus Auckland is constantly mentioned as having a housing shortage.


Ross

I recall seeing charts that use a base year of (2004 i think) that show that with the exception of the latest spike in values Auckland has not outperformed from a CG perspective. While I agree Auckland is the low risk bet if you wanted to bet on a capital gain (the favourite in betting terms).

[Don't believe the Hype]

yes agree it's a huge loss but in 3 years I should be able to turn the loss into gain.
on a yearly basis I should be able to repay the loan by $100k (outside of monthly mortgage pmt and without compromising my living standard) so technical in year 3 the rental property should be able to turn into positive cashflow (if interest remains around 4%).
Thanks for the advice and concerns, not an easy decision to invest huge amount of money in current market.

This is a mistake I see people make all the time. Thinking they can turn a poor performing asset into a better performing asset due to investing a huge amount of their own resources (in your example $100k/yr).

You need to consider the opportunity cost of having to plow $100k/year into this asset just so it can become CF+ in 3 years.

If you were able to buy a CF+ property instead of this one you could use the next 3 years to fund $300k deposits so in theory have a $1million portfolio (at purchase price) in 3 years on top of what every you hold today and the purchase you're thinking of making now.

If you'd said to me that you were going to buy the property in a CF- position, leverage the strong cash flow you have to fund a renovation or alteration that including the additional investment would result in CF+ then the additional investment is a good choice. But to simply pay down debt to get to CF+ is a mirage

[SwissKiwi]

This is a mistake I see people make all the time. Thinking they can turn a poor performing asset into a better performing asset due to investing a huge amount of their own resources (in your example $100k/yr).

You need to consider the opportunity cost of having to plow $100k/year into this asset just so it can become CF+ in 3 years.

If you were able to buy a CF+ property instead of this one you could use the next 3 years to fund $300k deposits so in theory have a $1million portfolio (at purchase price) in 3 years on top of what every you hold today and the purchase you're thinking of making now.

If you'd said to me that you were going to buy the property in a CF- position, leverage the strong cash flow you have to fund a renovation or alteration that including the additional investment would result in CF+ then the additional investment is a good choice. But to simply pay down debt to get to CF+ is a mirage

That's great advice.

ps - what does it cost to subdivide in Hamilton?
Auckland is 160k - 200k basic.

Completely absurd cost.

[GLin]

Buy cashflow positive properties from day one (work on 100% financed), they are out there, especially in and around Hamilton.

[Don't believe the Hype]

Buy cashflow positive properties from day one (work on 100% financed), they are out there, especially in and around Hamilton.

Good to see you've finally learned how to create wealth.