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**The_Dog** · 26-06-2004, 04:10 AM

Hello BJW and welcome to the forum. I see you are from Hamilton, my old stomping ground.

It seems your experience is very similar to mine, and need to learn patience, unfortunately. There are things you can do to shuffle things along such as talking to different banks, different brokers etc. But at the end of the day, housing is a slow moving monster. Banks can be your friends, if they are cautious; it is not normally without good reason. Not to say you should not seek a second opinion, simply that banks are very well connected and may know things about impending market forces, interest rate rises , lending criteria etc that you don’t know.

As you have identified, there are a couple of ways to boost equity. One way is waiting for capital growth (yawn), and another is to buy under market value, or somehow boost the value through improvements. The opportunities for these strategies are limited in the current market.

If, as you say, your properties are CF+, then I’m surprised the banks are targeting your debt servicing level and not your equity level. Perhaps you should try boosting the revenue from your properties by adding features, rather than thinking equity will help you. If, like me, you earn more from your houses than your salary, it’s the rental income you should look to boost (because banks recognise 70% of any rental increase, and only 30% of any salary increase, therefore concentrate your efforts where you will get the most reward).

Im in the property game for the long haul - just want to kill off the day job within a few years

.

You seem to have mixed aspirations!!!

No-one said it was going to be easy. Let me rephrase that, no-one that has a realistic understanding through several cycles said it was going to be easy!!

The Dog

PS, can someone please tell me how to get a quote in from other text ![/quote]

**orion** · 26-06-2004, 10:06 AM

http://www.propertytalk.co.nz/module...8&start=15

Hi bjw, congratulations on your first post.
The_Dog has answered to some degree, I will just add a couple of other things.
First of all, have a read of the 7th post down in the above link if you haven't done so already. It was a post I did only a week or two back about getting started, and what is involved.

does anyone have say a 2year strategy that allow buy+hold say every 2-3months??

The best way of course here is to buy at about 80% or as close to it of perceived market value. This way you can refinance a few months later for 80% of valuation, giving back your initial deposit.

How do people with high risk profiles and a 2year plan (like myself) who wish to purchase more properties (for the right price of course!) keep going? (without wrapping )

What actually is your two year plan? How many properties have you set as a goal to purchase in that time? Would it be 8 - 12 (1 every two or three months)? If so, is the probelm more the cash flow in the eyes of the banks, a real cash flow problem, or a problem of finding that amount of properties below market price to buy?

(even though you have cashies to burn from your day job and +ve cashflow properties...)

Do you mean high cash-flow income, or cashies - as in undeclared income so the banks do not recognise it?

my current strategy has been to buy a few buy+hold highly +ve cashflow properties, with the intention of now purchasing a few buy..and do up..and sell properties, (ok I'll admit it..speculate) to fund a few more buy+holds. (all are in appropriate structures so no tainting, etc)

Sounds like a good strategy to use, definitely one way of doing it.

overall aim is for positive cashflow to replace salary within a few years- mainly for security reasons.

Do you mean positive cash flow from properties with mortgages still on them, or properties with no mortgages - ie unemcumbered? How many is a few years?

but the mortgage broker now tells me I can't buy any more.
so I'm left with the prospect of selling some +ve cashflow properties,
to fund some buy+sell (speculative) type ventures..to get the mortgages down to allow further buy+holds long term.
dont want to do this.
any way around it??
any better 2 year strategies around??
Im in the property game for the long haul - just want to kill off the day job within a few years.

I agree, I also wouldn't sell of good buy and holds to do this, so rule out that option.
A few options to think about: -
1) be patient and wait it out (probably not by the sounds)
2) joint venture with another investor in the area with buy and sells, or buy, do up and sell.
3) find properties for other investors below value for a fee.

I'm wondering why is it only a two year strategy, what is your 5 and 10 year plan? Is the main reason to give up work in two years? What would you do if you gave up work? I've retired twice in the past, first for 2 years from 1992 - 1994 and then again in 1998 - 2002. They were the most boring years ever, retirement is very highly over-rated. The stage you want to get it is having the choice of whether to work or not, and then still do something to occupy your time - whether it is a job you love, a business you start, or purchase etc. It's very boring just doing nothing with a passive income. You really need to be very clear on what you want and get it on paper. The more specific you can be, the better.

Regards
Graeme Fowler

**Gerrard** · 26-06-2004, 02:16 PM

Interesting question, and one I have been grappling with for a while.

I've been out chasing quick cash deals, but with little success. I've either mised them (someone else moved faster), there haven't been many around, or I'm just not recognising them. I'm only looking in a few parts of Wellington, because I just don't know the other areas well enough to tell what is a bargain.

I've also been considering what to buy next as a buy and hold:

Even with the "boom" of late in smaller towns there are still some good yeilds available and the chance to pick something up under value. This would allow me to keep buying more, but I'm wary of a "crash" hitting these locations harder than other areas of NZ.

An ordinary 3 brm house giving a 7% - 8% yeild in a main centre would use up equity, reduce my servicing ratios, and therefore limit what I could buy in the future.

The likes of an HPC Minor Dwelling deal (which gives a good yeild for a main centre) still uses up equity, so again I would not be able to purchase anything else for a while to come.

So lately I've come to the conclusion that you either have to be very good or very luck to regularly get good properties at good prices. That means the slow and steady route for most people as Graeme described.

Regards
Gerrard

**Monid** · 26-06-2004, 07:11 PM

Hi BJW

In general I concur with Graeme & the Dog have already said, so I won't be adding much.

Basically our plan has been to replace our income (such as it is

) with cashflow from properties, once our house has been paid off of course... When we started last year our first purchase was at %80 of the GV (I know GV is meaningless but our Banker thinks it means something) which meant in the bank's eye (at least eventually) the property didn't cost us anything in terms of equity, our third place was the same actually %73 to be precise. So we have sort of mixed high equity properties with even higher cashflow properties. With our last purchase we came to the end of our tether, we have run out of equity in the bank's eyes (with revaluing I think we are at about %60 but I don't really have time for further investing at the moment, I am too busy writing lecture plans and investing in my, fingers crossed, future career)
But presuming you have bought fairly positive properties it is hard to see how you could run into trouble with debt servicing, all of our properties take care of themselves in the bank's eyes.
Lets do some figures
for a $100000 house fixed for 2 years the weekly repayments will be about $170
to cover that your rent will need to be about $240 before it will cut into your debt servicing.

So this is basically the sort of property you need to look for, fairly hard to find in the current market, though still possible at the cheaper end.

But for the property to be truly cashflow positive you have to covering the other costs of at least:
Insurance $6
management $15
Rates $20
Maintance $10

So I would have thought that looking for a property with that sort of return was what you would be looking for anyway.

So some other strategies then:
How about paying off your existing cashflow properties faster, much faster?
This is effectively our plan, with the properties we have already (not counting any more speeding up from buying even more cashflow positive properties...) we will pay off our home in 2007 and the rest of our properties by 2014, puting in $300 a week from our pocket and investing the positive cashflow from each house back into the houses. With our PPOR paid off the other properties should provide us enough to live and play on even after tax.

The additional advantage of this strategy is that it allows you to speed up your purchasing of new properties as well because as you pay down your equity you are making more funds available and decreasing you debt to servicing ratio at the same time.

I guess on the down side it isn't financial independence in two years, unless you have a large surplus on your income...

Graeme btw Agree with you absolutely on the issue of retirement, my wife and I are just really starting out, why would we want to retire... Well we don't but being able to have financial freedom that would be just dandy.

Cheers David

**fudosan** · 26-06-2004, 08:51 PM

Originally posted by Monid

we have run out of equity in the bank's eyes (with revaluing I think we are at about %60

Are you saying at 60% LVR you are running out of equity?

**Monid** · 27-06-2004, 12:47 PM

Not quite Fudosan

The bank thinks we are at %80 but we have done some work on properties since then, prices have risen considerable and our own house was valued over a year ago now. I am pretty sure, even with a conservative estimate that the value of our properties is such that if we revalued everything we would come out at about %60. Personally however in the current climate I am not too keen on stretching beyond %70, and as I said I really don't have time for more investing, especially given the work needed to find a reasonable (let alone good!) deal these days.

Cheers David

**bjw** · 28-06-2004, 07:48 AM

strategies for 6+ properties a year...

well to answer everyones questions from previous post:

the properties Ive bought to date all had twists.
ie buy for under market value, add value (add rooms, minor dwellings, etc) crank up the rent, onto the next project.

cashies - i meant from salary. no under the table stuff going on here!

soooooooo....
i've gone out to speculate on 2-3 houses before january to fund more long term holds.
sold a cashflow +ve property for 20% above market value this weekend.
went like a hotcake (still 9.5% return for buyer) - so obviously
things are still too heated to find real bargins in hamilton.

although having said that Im a firm believer (thru experience) you can find bargins/deals/good buys in any market.

my short term plan is to speculate in a rising market and buy
long term holds in jan-march next year when prices have dropped back a little. (hopefully by at least 10%)

graeme - read your strategy from "are you an investor or speculator"
and that is pretty much what my strategy is long term.

out of all of this I've figured i get my kicks out of speculating.
so far fingers havnt been burnt - i realise they will and need to be
as you learn your biggest lessons from your biggest mistakes...

also got to figure out a good business to get into as a sideline to
property investing - something related.. still thinking on this one.

cheers,
BJW

**kieran** · 28-06-2004, 09:12 AM

BJW,

You know 'you make your money when you buy' (Dolf de Roos said it first!) but you should also check with your broker what impact the deal will have on your borrowing capacity. That way you can be proactive and know which opportunities are worth buying/pursuing and which are not.

Personally (due to my finance industry background) I have always focused on buying properties which will have as little negative impact on my borrowing capacity as possible (or even a positive impact if it's possible). My latest is a 3brm house in Henderson for $210k with a $238k valuation (Yes - independent and fair). Renovations are costing @$5k and I have a tenant lined up at $330/wk upon completion of renovation. Plus I am constructing a Minor Dwelling for $112k which will also generate $350/wk.

Valuer indicates a R/V on completion of $380k.

So all up:
Cost $327k
Value $385k
Rents $35,360
Yield 10.81% (Based on actual cost)

Cost represents 85% of valuation on completion. Considering I could borrow up to 90% even as a standalone deal this is self funding from a financiers perspective on an equity basis. And on a cashflow basis it is also self funding as it creates a surplus cashflow in reality, but in the banks eyes it slightly reduces my borrowing capacity after they scale back the rent and add an interest rate margin for the purpose of calculating serviceability. The impact on my borrowing capacity is minimal so I can keep doing these deals as long as the numbers stack up.

Gerrard you state:

The likes of an HPC Minor Dwelling deal (which gives a good yeild for a main centre) still uses up equity, so again I would not be able to purchase anything else for a while to come.

See my comments above re equity created.

**fudosan** · 28-06-2004, 11:07 AM

Originally posted by kieran

Personally (due to my finance industry background) I have always focused on buying properties which will have as little negative impact on my borrowing capacity as possible (or even a positive impact if it's possible).

Excellent point we need to always remember!

**Gerrard** · 28-06-2004, 11:20 AM

Hi Kieran - is it typical that the RV comes in higher than cost on most of your minor dwelling deals?

This is something that is never mentioned on the website / emails about each property (although it is good to see you're not selling them on the basis of "gain instant equity").

I also note your estimated rental is $330/w on the original house and $350/w on the MD. Why does the MD command more rent? Obviously it is newer, but it is also smaller than a typical 3brm house.

Cheers
Gerrard

**kieran** · 28-06-2004, 12:04 PM

So far all our Minor Dwellings have valued up well and created extra equity. We don't sell them on that basis although we do maintain that the build will add value 'integrity' to the existing dwelling. (i.e. our Minor Dwellings are not just rectangular boxes!).

The MD's do command more rent as they are brand new and they have no wasted floor space (unlike many older houses with inefficient floor plans). Also the house I bought for $210k is 3brm in only @80sqm anyway so the Minor Dwelling is not that much smaller at 65sqm.

**bjw** · 28-06-2004, 08:44 PM

self funding minor dwelling property deals..

Kieran-
listened to your talk at the W.P.I.F. monthly meeting in Hamilton around oct 2003- good talk. the cycle thing - great. confirmed a few suspicions.
where are things on the clock up in Auckland.. 2-3am?. taking a while to
come round to 6am isnt it? longer than I thought thats for sure.
I reckon Hamiltons still a "couple of hours" behind Auckland.

id like you to mull over my figures compared to yours - mainly from the point of view of you having a finance background.

I wanted to do more of these deals but my mort. broker said....no.
I was gutted.

just like you I thought they would be self funding...I'd discovered the seeds for endless money trees..and life was going to be a real bed of roses...could "retire" early with my young family...spend the odd day on prop. maintenance once a month...and change careers...but alas...not so....

buy and add minor dwelling figures:
cost 186k.
valued 200k. (bank went off bought price for lending-humph).
4bedroom house.
1k renos.
twist was a skyline gottage 60m2 cost 70k all up everything.
total cost 186+70+1 = 257.
final valuation 295k. (5k chattels) from respectable valuer- not jacked up.
rents 28,860 (555/wk).
yield = 11.23%. (on actual cost- not bad by any ones measure.)

can you please explain how it is "self funding from a financiers perspective". im not dumb with numbers - just the finance industry
interpret numbers differently to us non finance industry people!.
cashflow basis - yep got that. obvious. (+ve cashflow always helps
the good old DSR calculation)
equity basis - huh?? please explain..
this is where I need some lessons...and the main reason I flicked the
above property weekend just gone (good for auckland buyer. good for me - a win-win) to go out and do some buy+sells to increase my equity to allow more of the above..

thanks,
BJW

**kieran** · 29-06-2004, 08:20 AM

where are things on the clock up in Auckland.. 2-3am?. taking a while to come round to 6am isnt it? longer than I thought thats for sure.

I'm not sure what you mean by a.m. as my property clock has no a.m or p.m. It just reads from 11- to 1- (being the Boom) 1- to 7- (being the Slump) and 7- to 11- (being the Recovery).
Anyway I believe Auckland has only recently entered the Slump and I dont expect it to end for several years ...

can you please explain how it is "self funding from a financiers perspective". im not dumb with numbers - just the finance industry
interpret numbers differently to us non finance industry people!.
cashflow basis - yep got that. obvious. (+ve cashflow always helps
the good old DSR calculation) equity basis - huh?? please explain..

Self funding was probably a slightly confusing term as initially I rely on other equity to 100% fund the original purchase and then fund the construction of the Minor Dwelling using the equity created by the construction. But the net effect at the end is that I owe less on the completed property than a bank will lend me on it as a standalone deal.

The numbers on your deal were fine because of your equity creation. i.e.
on purchase and with gottage. This property was self funding from a lending perspective because your loan to value ratio on the completed project was 87%. Most banks will lend up to 90% therefore you could take out any initial cash input you made OR if you used equity in other property to do this deal then you could again rely on that equity in other property to go and do another deal like this, etc, etc.

If you only had enough equity to do this once then you would be fine because you should be able to keep repeating this pattern with the only drawback being you may need to just do 1 deal at a time (ie it can take months to buy, build and then be ready to buy again).

This is how you can build an ongoing cashflow stream. Far too many investors I have met have focused on equity rather than cashflow. I say create enough equity to make the deal self fundable when you buy (or shortly after buying) but build positive pre-tax cashflow as your ultimate priority...

Man/Woman can not retire on Equity alone...

Is this any clearer?

**donna** · 29-06-2004, 03:08 PM

Kieran,

Your Seminar in Wellington is that going to include Hybrid Minor Dwelling info?

Cheers,

Donna

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