Getting started in 2018 (or more realistically, 2019?)

[Naithin]

Hey all,

Been a bit of a lurker of late, finally decided to take the plunge and register. Much like I'd like to take the plunge into creating a better base of wealth for my family's future - likely via property investment. But with the tax benefits of negative gearing seeming going the way of the dodo from the start of the next tax FY and it looking like the safety net of capital gains is flattening out plus not having a large base of savings to use as a deposit at this stage, I'd really appreciate some advice on getting started. And this advice might even be 'Don't do it' or 'Don't do it yet'.

To provide some context on our situation:
- Home valued ~735k, outstanding mortgage ~425k. Largest part of the mortgage is fixed until July '19, with the remainder in a floating arrangement.
- If I'm understanding the current LVR restrictions and calculations correctly, then this means 735 * 0.8 = 588k (to get to leaving 20% in current property), then 588 - 425 = 163k 'usable' equity. Meaning maximum loan amount using this would be 465k (at a 35% requirement for Investment).
- High degree of disposable income - servicing a P&I mortgage and rental expenses (I've calculated for property management, maintenance, rates, insurance an accountant and body corp if I went into the apartment space) would not pose a problem.
- However very minimal savings; I'd be working toward at minimum putting together a few months of expenses (assuming no tenant in) before taking the plunge.
- Our financial discipline is not great. We're excellent at putting bills first and ensuring things get paid - but to date have had bad habits on saving. (Have taken a few actions on resolving this, and the motivation of now wanting to improve our overall position helps too)

Assuming my calcs are right (and that the RBNZ review, which I believe is due for release in a few days, doesn't materially change things) then at the amount I could borrow looks to make the Auckland market quite restricted, but not impossible. However I've read the other thread on difficulty finding a cash-flow positive opportunity here difficult and the scans of homes.co.nz I've been doing verify. I'm not opposed to buying elsewhere (e.g., possibly Hamilton, Cambridge, something of that nature?) but I know so relatively little about the areas. The idea would be to buy and hold, paying down P&I - but the actual structure of any loans I'm unsure on.

I've read a lot about the advantages of using a revolving setup in the context of getting into additional properties more quickly - my concern is the aforementioned lack of discipline on savings. I'd want to see a longer period of us being 'good' before trusting we'd use it sensibly, even though my feeling at this point is that the laser focus we've put on not just our future but also our kids has certainly helped.

What am I after specifically? Just... more practical information I think, but set in the context of today's seemingly quite Landlord hostile environment. If you were starting out now with just your owner-occupier home to work with, knowing what you do about the present environment and upcoming changes - what would you do? Would you still go ahead or steer for other shores?

[Nick G]

Hi Naithin

A lot to work through... I'll paste your comments/questions below and insert some ideas for you....

But with the tax benefits of negative gearing seeming going the way of the dodo from the start of the next tax FY and it looking like the safety net of capital gains is flattening out plus not having a large base of savings to use as a deposit at this stage, I'd really appreciate some advice on getting started. And this advice might even be 'Don't do it' or 'Don't do it yet'

>> Negative gearing is not a very safe strategy IMO, particularly when you are using equity to buy. Why spend $1 to get back $0.30. It doesn't scale nearly as much as getting $1 and paying $0.30 in tax.

>> Sure cap gains are low in the last year in a couple of areas, amazing elsewhere. However start to think about investing for a bit of cashflow. When the gains come, they come to all properties, so the people who are getting good cashflow get a stress-free investing live AND capital gains.

To provide some context on our situation:
- Home valued ~735k, outstanding mortgage ~425k. Largest part of the mortgage is fixed until July '19, with the remainder in a floating arrangement.
- If I'm understanding the current LVR restrictions and calculations correctly, then this means 735 * 0.8 = 588k (to get to leaving 20% in current property), then 588 - 425 = 163k 'usable' equity. Meaning maximum loan amount using this would be 465k (at a 35% requirement for Investment).

>> Correct. However servicing is also something that Banks have tightened up on a lot now and has become a roadblock that hits many before equity does. I suggest not trying to work all this out and talking to a good broker instead.

- High degree of disposable income - servicing a P&I mortgage and rental expenses (I've calculated for property management, maintenance, rates, insurance an accountant and body corp if I went into the apartment space) would not pose a problem.
- However very minimal savings; I'd be working toward at minimum putting together a few months of expenses (assuming no tenant in) before taking the plunge.

>> Unless you are doing a renovation there should be no reason not to have a property tenanted within a few days of ownership.

- Our financial discipline is not great. We're excellent at putting bills first and ensuring things get paid - but to date have had bad habits on saving. (Have taken a few actions on resolving this, and the motivation of now wanting to improve our overall position helps too)

>> This is an easy one. Savings comes out when you get paid. Then pay bills, then live off the rest. You can set it up in 10 minutes at the bank today if you're serious about doing it.

Assuming my calcs are right (and that the RBNZ review, which I believe is due for release in a few days, doesn't materially change things) then at the amount I could borrow looks to make the Auckland market quite restricted, but not impossible. However I've read the other thread on difficulty finding a cash-flow positive opportunity here difficult and the scans of homes.co.nz I've been doing verify. I'm not opposed to buying elsewhere (e.g., possibly Hamilton, Cambridge, something of that nature?) but I know so relatively little about the areas. The idea would be to buy and hold, paying down P&I - but the actual structure of any loans I'm unsure on.

>> Plenty of property markets in NZ. A business like mine (link in sig) assists people buy in any market in NZ regardless of where they are at. Once our buyers figure out what they want from property we suggest a market and do it all for them

>> However you don't want a sales pitch. I would just ignore Homes.co.nz. Property is a lot about what you can turn something into. There is a say that investors don't buy a yield they create it.
I've read a lot about the advantages of using a revolving setup in the context of getting into additional properties more quickly - my concern is the aforementioned lack of discipline on savings. I'd want to see a longer period of us being 'good' before trusting we'd use it sensibly, even though my feeling at this point is that the laser focus we've put on not just our future but also our kids has certainly helped.

>> Well you could wait another year... for interest rates to go up and you have another reason not to start? But again, a property that pays for itself is a good start.

What am I after specifically? Just... more practical information I think, but set in the context of today's seemingly quite Landlord hostile environment. If you were starting out now with just your owner-occupier home to work with, knowing what you do about the present environment and upcoming changes - what would you do? Would you still go ahead or steer for other shores?

>> I'd go to the bank today and set up a savings "siphon". Lifestyle adjusts accordingly. I'd then talk to a broker who works with investors. There are some on this board. I'd read some PI books, "The NZ Property Guide" by Lisa Dudson is a start - check your library or try the free course in my sig if you prefer online. Then I'd start to think about setting some goals that are big and real enough to lead to you guys taking meaningful action. I would go to some APIA evenings and start to talk to other investors. Just start to get this all sloshing around in your head. The biggest one is get past needing it to be close to you or wanting it to be a second home you could live in. Focus instead on a profitable rental that you will never ever live in because it is busy earning for you :-)

[Naithin]

Thanks Nick,

Appreciate you taking the time to respond with such detail!

- Our financial discipline is not great. We're excellent at putting bills first and ensuring things get paid - but to date have had bad habits on saving. (Have taken a few actions on resolving this, and the motivation of now wanting to improve our overall position helps too)

>> This is an easy one. Savings comes out when you get paid. Then pay bills, then live off the rest. You can set it up in 10 minutes at the bank today if you're serious about doing it.

Done! Had just finished setting that up over the course of the weekend in fact. Income from my wife and I now to go into the floating portion of our mortgage, with bills to direct debit or be paid by automatic payment out of here, along with auto-payments to transfer into savings (now with a different bank entirely from our day to day transaction accounts) and our budgeted discretionary money into our personal accounts.

This is one of those things we kind of had an inkling that we were 'doing it wrong' but had formed very bad habits from when we were not nearly so well off and 'couldn't afford' to have enough of a buffer to just let everything be paid for automatically without planning around it. But then we've both progressed in our respective careers, finished paying off our student loans - and just never went back to adjust accordingly. Until now!

>> I'd go to the bank today and set up a savings "siphon". Lifestyle adjusts accordingly. I'd then talk to a broker who works with investors. There are some on this board. I'd read some PI books, "The NZ Property Guide" by Lisa Dudson is a start - check your library or try the free course in my sig if you prefer online. Then I'd start to think about setting some goals that are big and real enough to lead to you guys taking meaningful action. I would go to some APIA evenings and start to talk to other investors. Just start to get this all sloshing around in your head. The biggest one is get past needing it to be close to you or wanting it to be a second home you could live in. Focus instead on a profitable rental that you will never ever live in because it is busy earning for you :-)

This all started for me over a conversation with a colleague at work who owns a small portfolio of properties. Although the more I've researched things myself - the more I've realised that this persons point of view may not necessarily entirely comply with current wisdom. i.e., running a number of interest only loans, using negative gearing heavily (was surprised when I raised with them that all signals so far suggest that this will be gone come next tax FY), in it for the capital gains more than anything else after the minimum hold period required to pass the bright line test and one you called out too - they buy places they would want to live in, but as more of a speculator than an investor I suppose it would make some sense then given the desire to broaden the range of people who might potentially be interested in buying.

So while I appreciate their willingness to talk the details of their situation with me and give me the prompt I needed to take a serious look at this - had already come to the conclusion that I'd need a range of views. Signed myself up to attend the Dec 4th seminar from 'Positive Real Estate' (curious whether anyone has had any experience or views on them too).

I'll take a look at Lisa's book as well. Thanks for the recommendation!

>> Negative gearing is not a very safe strategy IMO, particularly when you are using equity to buy. Why spend $1 to get back $0.30. It doesn't scale nearly as much as getting $1 and paying $0.30 in tax.

>> Sure cap gains are low in the last year in a couple of areas, amazing elsewhere. However start to think about investing for a bit of cashflow. When the gains come, they come to all properties, so the people who are getting good cashflow get a stress-free investing live AND capital gains.

Makes sense, and as alluded to above - I had started to realise already that perhaps not everything my colleague was doing was necessarily going to be 'right' for my situation. I don't want to do this as a speculator or risk getting tainted as a trader. This is about creating longer term wealth for the family and if it provides the chance to retire earlier than otherwise would've been the case in the process - even better!

This first step seems to be awkward though, with at present requiring a 100% (or nigh close enough to) loan to kick things off... It's a bit painful! Which is largely why - if negative gearing wasn't going away anyway - I'd have been somewhat comfortable with it with a view to even becoming cashflow neutral with it to start with, as a step toward an eventual pay-off, be that through rent increases and inflation over time or be it a worst case 20-30 years hence, when the mortgage was done with and it was all (minus expenses) raw income.

I'm no longer set on making sure it is a place I'd be happy to live in myself, and I'd already determined that with my wife and I's work schedule a property manager would be mandatory anyway - so I'm not attached to Auckland either if a service such as your own can help provide the necessary local knowledge, etc.

>> Well you could wait another year... for interest rates to go up and you have another reason not to start? But again, a property that pays for itself is a good start.

Fair call. I suppose though that even if we accept it is best to go ahead immediately even if that means 100% mortgage - that we'll still need to have set aside enough to cover initial close costs such as solicitor (~2.5k?), any inspections we want done as part of due diligence (~$600-$1000?), possibly an accountant to ensure right structures (~$650?) and if going the apartment route, assume body corp ($3.5k-$4k?) would be payable on-close of sale as well.

Anything in there I've missed in your view, or otherwise materially over-estimated?


Thank-you yet again for your response, I've also signed-up for your course and would absolutely consider your business for providing the knowledge and connections to purchase in another region!

I've already got a mortgage broker (from when we bought our first home) - but while he does deal in investment properties as well; does seem less interested at the moment. Although being absolutely fair to him - as you may have gathered, I'm still very much in a fact finding state even now. When I first broached the idea with him it was from a place of even greater ignorance, and perhaps I was hoping for services more akin to what a (paid) financial advisor would offer rather than his core service.

Take care,
- Nait,.

[AvoOnToast]

I would always pay down principal, especially if you don’t have a good saving habit.
Also manually pay all the bills to get an idea of where money goes. Whereas money coming in it’s best set and forget so it stays safely in the mortgage account.

I am also in the same boat, deciding whether to go ahead buying with 100% mortgage. If I do I will probably aggressively pay down debt to get to cash flow neutral asap. And be sure that I’m able to hold on to it for 5 years.

[DaveW]

If you are a more active investor then I would add further to Nick's comments...

>> Negative gearing is not a very safe strategy IMO, particularly when you are using equity to buy. Why spend $1 to get back $0.30. It doesn't scale nearly as much as getting $1 and paying $0.30 in tax.

Maybe the property has add value potential, in which case paying $1 to get back $0.030 in the short term might be a good investment because elsewhere on the property you could be spending $1 to get back $4.

>> Correct. However servicing is also something that Banks have tightened up on a lot now and has become a roadblock that hits many before equity does. I suggest not trying to work all this out and talking to a good broker instead.

Talk to many brokers from both first and second tier sources. You must also you must do your own homework on properties in order to increase the rents and equity. Why buy retail?

>> Unless you are doing a renovation there should be no reason not to have a property tenanted within a few days of ownership.

Even if you are doing a renovation you may tenant the property while renovating the outside, or you may tenant the property on a short term basis while planning for the renovation, or you may even tenant on a lower rent if the tenant allows for internal renovation.

[Nick G]

@Dave - absolutely right. I've just carried a large mortgage empty for a year because I did just that, "lost" a bit of money to make a lot more. I found it doable because it wasn't my first rodeo however. In Nait's case where he's just righting the ship, I think something simple that makes money right off the bat and sets him up for more of a potential project down the line might be better.

@Nait - great to hear you've started taking some positive steps. Our service pairs you up to buy with a local investor (in Auckland too), so you'll get a deal they see as an opportunity, (almost more important) have checked for potential pitfalls and will get access to their local contacts for inspections, PM etc. It's a big shortcut, particularly on potentially avoiding mistakes.

Happy to have a video call if you like, particularly this week and next as I'm at home with my arm in a sling! Maybe can give you some more ideas and save you a lot of time. It sounds like you're on the right track with how you're parsing your friend's strategy tho.

Positive RE offer a $5K (I think) mentoring service and once you're in they steer you towards buying new build off the plans developments. Some investors swear by them and have had good results from recent increases but it is still capital gain focused.

[Naithin]

Thanks for the replies all! I thought for a little bit there my last post had been eaten by the system. Hah.

AvoOnToast: So you'd go for a Reducing loan type rather than Table by the sounds of it in order to achieve the reduced payments?

DaveW: Appreciate the alternative view! Forgive the no doubt incredibly newbie question; but - first and second tier sources? Is this referring to the likes of TradeMe or other Property locator sites on one side and Agents or services such as Nick's on the other? Or is it another split or differentiation entirely?

Nick G: Definitely all for starting out relatively simple - especially while so tied to full-time work as the family income source as we presently are. Getting one up and running that is positive as a starting point would be amazing.

Sorry to hear you've injured yourself too! I broke my leg a couple of years back at this time of year, was laid up in bed over summer - perhaps one of the least enjoyable times ever. Hopefully you're at least a little more mobile though.

As an update on the savings situation though - while it is admittedly still very early days; I feel better about the chances of this setup than anything we've given a stab at previously. Having the income routed into an entirely different spot (the floating portion of the current mortgage, in fact) does seem to make it easier for us to accept leaving there. It's a bit of a mental shift from 'giving up' the extra money when we had to move it out of our transactional accounts to almost feeling like stealing it from ourselves if we move unbudgeted amounts back into our spending accounts. I've also setup PocketSmith (an NZ based outfit that works on an online package in the same vein as the budgeting software YNAB, or Mint perhaps) - being able to see the projections of where things will sit if we can be disciplined with the extra income certainly helps to bring it alive from that angle too.

re: video call - that could be excellent, but not sure how the timing would sit with you as weekdays during the business hours my wife and I both work. Tomorrow night off to the Positive RE seminar (and also booked into the GRA one advertised through here, although that is in the New Year sometime I believe), but then if you were up for either an evening or a weekend call then we could line that up. But assuming you more or less agreed with the figures I posited in the last post for the initial setup/admin costs for taking the mortgage - no major rush just yet as it'd be shortly after the New Year when savings started hitting those figures. Not sure how you're placed for Holiday plans etc, but I'd be off work until Jan 14th or so - so it's possible something in there might work better for you.

Take care,
- Nait,.

[Naithin]

Went to the PRE seminar last night - interesting crowd.

You were right Nick that they're heavily focused on Capital Gains; but they do also balance this out with looking for properties that will be cashflow positive.

Their service proposition is one of 'Lifetime mentorship and guidance' which is a fairly nice sounding proposition at surface level. They wouldn't discuss cost in the session - someone asked and the semi-jokey answer back leads me to believe your $5k figure is on the money.

I'm not opposed to paying for professional services/advice - particularly starting out, there is a solid argument to be made for investing in your success. It just seems a bit of a struggle to do any real due diligence on the services on offer short of knowing people yourself but then you're really only getting anecdotes.

I also haven't looked into the detail of what is actually included vs. what is an additional charge - reading between the lines somewhat I suspect the PRE service is limited very much to the general advice with potential leads from their real estate arm of the business. All other aspects - broker, lawyer, accountant etc - it sounds like they have 'Networks' and will put you in touch with their preferred partners to source the services as needed.

Happy to be corrected by anyone who has used the service or if they have representation here happier to talk more specifics than what was provided last night.

They also offered a free 1 hour consult, which I'll likely take advantage of.

The information presented otherwise was good - and I did legitimately get a few pieces clarified in my own head (e.g., taxation under the proposed ring-fencing of loss setup) - but was otherwise I think juuust general enough to give a flavour of the possible while keeping people afraid enough to want to use a mentoring type service.

It also reminded me what a terrible (or great, depending on your side of the fence) consumer I am. Being aware of it helps, but it is a constant battle to just not fall into the 'Yes - I need this' mindset.

[AvoOnToast]

>>AvoOnToast: So you'd go for a Reducing loan type rather than Table by the sounds of it in order to achieve the reduced payments?

In my buying criteria, if I cant comfortably pay P & I of a property, the cash flow is not good enough. You will probably have your own rules depending on your circumstances. The goal of property investment is to create passive income (capital gains can fast track the process but shouldn’t be the goal in my opinion) so yes paying off debt is going to be part of the process. On the other hand any kind of forced saving is good in this world of temptations.

[Rosco]

Hi Naithin,

I would start by joining your local Property Investor Association (www.nzpif.org.nz). Small investment to become a member (Waikato is $260) and then no more sales pitches, no trying to get you to buy a property etc.

Positive Real Estate - my understanding is that these guys make most of their money from getting commissions/kick backs from selling new builds. I don't consider them to be mentors! They are trying to sell you something. Sure if you buy and it jumps in value you will do well, that is called gambling on capital gains.
- I have gone through their numbers numerous times and I don't think they have ever been positive!

I would take your time, build up some knowledge (books, forums, PIA meetings and events, Property Investors Chat Group on facebook, video's on our facebook page etc) and then if you feel you need a mentor, then go to a true mentoring service that doesn't try to sell you something.

Ross

[Davo36]

They also offered a free 1 hour consult, which I'll likely take advantage of.

Read: Property mentoring sales pitch for one hour.

[Nick G]

I can teach you everything you need in 20-30 minutes on a Skype call next week. Free. I'm recovering from shoulder surgery and have some time on my remaining hand. You'll need to take the notes tho :-) You don't need a paid mentoring program.

[sidinz]

I second what Ross said about the Facebook group. As well as the same types of discussions you see on here, you see plenty of real examples of people's purchases, how they've added value, bought cashflow-positive in regional areas, etc. with photos and figures.
As well as investors ranging from the extremely experienced to the wannabe, there are a whole range of related industry professionals (agents, lawyers, accountants, PMs etc.)

You will find a diversity of investors with a range of strategies. Might be an idea to consider a few different ones and decide what suits you best. Sounds like you're a buy-and-hold, but what? Three bedrooms on a subdivisible section? Two units on one title? Somewhere you can add another bedroom? Inner city brick & tile units? Rent-by-the-room?
Whom do you want to rent to? Groups of students or young career starters? Retirees? Mum, Dad and the kids? A young couple? Single parent with one kid? Executives on transfer?
Lots to mull over.

To be honest, for your first purchase, I'd be steering clear of apartments with Body Corps. Extra layer of hassle and potential problems that you don't need. Assuming your servicing is ok, the money you have to spend will go quite a way in the regions.

[Naithin]

Thanks for the further insight, advice and commentary all.

I figure you're right Davo on the sales pitch, if the information is available through the likes of Nick, the FB page, etc then can do without it.

And good questions all Sidinz, I'm reasonably open except for the fact I wouldn't be wanting to do this as a social project taking over those better served by HNZ. I cannot afford to getting started out of the gate. So would need the tenants of the first investment property I go in on to have a reasonably stable financial position. But then if that's a young couple, retirees, dad and kids, mum and kids, dad and dad and kids - that's of less importance. (Excepting of course the understanding that naturally kids will apply a bit more wear and tear potentially!)

Nick, I'll drop you a message to see if we can arrange a time that suits.