How much is enough?

[Nobleone]

Hi All,

Just wanted to get forumites thoughts on what you would consider to be enough capital gains on an IP over a 12-month period in order for you to feel happy selling.

A lot of 'guru's say that cashing in for profit, at the right time, is all part of a healthy overall investment strategy.

For the forumites that like details, I have held one of my IP's for 12-months and if I sell now I can reap $21,000 CG before costs.

It is currently cashflow positive before tax, but the town only has a population of 950 people and my concern is that if the NZ economy takes a bad turn it will be small towns that hurt the most.

Any thoughts are appreciated.

Cheers, Nobleone.

[Cliffy]

It's hard to say from those details.

What did the property cost?

a $21000 gain on a $21000 house is pretty good but $21000 on a $400000 house may not be

[Nobleone]

Hi Cliffy,

A good point... Sorry for the oversight... Purchase price was $59K

Cheers, Nobleone.

[fudosan]

Hi Nobleone,

Can you avoid paying capital gain tax? What reason could you give to IRD to say that you are not trading? I'm interested in learning how people deal with this issue.

[Fish]

When I look at these things I take the "sunken cost" approach. This means that I don't look and how much I paid for it, how much it has cost or how much money it has made.

I look at my current position and think:

A) this is a good investment, i will keep it; or

B) this is a risky/bad investment, the money/capital is best used somewhere else

You could have purchaced the house for $1,000 or $100,000. This is now irrevalant, it is a sunk cost. You do what is best going forward, not looking backwards.

[CJ]

I agree with Fish,

Forget the past. Ask yourself what is the best use of my dollar.

If you think the town is risky and the return doesn't justify it, yet you beleive you can find another investment that has a better risk return ratio, go for it.

CJ

[Baywatcher]

Also you need to ask yourself, what drives small town NZ.
I was having a look at an Australian property forum-propertyinvesting.com in the NZ section. They have huge confidence in their + cashflow investments with continued capital growth in small rural towns.
What amused me, was they have only heard of these towns for 5 mins and know one asked what are the economic drivers of these areas.

Farming
-land has doubled in price in the last 5 years
-incomes have improved at the most by 20%
-expenses have increased around 10%
- interest rates are 1% higher than what we pay and rising
-world commodity prices are at record highs
-the dollar is due for a correction, incomes will rise but so will expeneses due to imports such as fertiliser, machinery, feul etc

When times get tough down on the farm and believe me they do farmers reactions are

-sell the batch
-stop all capital expenses and maintance to a minimum.
-lay off a worker who was employed when the good times rolled so they could spend more time at the batch.

The effect
-the rural service towns wind down
-small business lay of staff as the cheque books close
-causal labour leaves for greener pastures
-school rolls drop
-low demand for housing

The Question
How far have our Australian friends pushed small town NZ over there long term trend lines and are they due for a correction ?

[Sapphire]

Hi Guys

I haven't posted before but am an avid reader of this and other forums. I am a NZer, and have been expat in Melbourne for six years due to my husband transferring with an IT project. Yes, we will return permanently one day, for certain!

We have owned one IP in NZ for 6 yrs that was unintentionally -ve geared (ie. it was the family home) but is now +ve, except for maintenance when necessary. We have been very lucky in that we have had a very good PM and have had the same tenant for the whole 6 yrs, (even though she was a solo mum with 4 kids and on a solo benefit). It just goes to show, you can't always tell who will be a good tenant and who will be a bad one.

We were able to hang on until prices revalued and we now have around 40+% equity and are starting to look for a 2nd IP. I'm doing heaps of research through property websites, forums, etc, but lucky for us we have some general knowledge of demographics in some of these towns.

I must agree with Baywatcher wholeheartedly about the small rural towns - major generalisation I know, but I would definitely not buy in some of them.

ie. Kawerau is reliant on one major industry and they only have to make 200 workers redundant, which they have done more than once, and rental properties will suffer for sure. How many Aussies would know this unless they were a NZer first.

My brother owned a house in Ohakune and had no end of trouble trying to rent it out, even using a PM, and even when it was finally rented out it was -ve, even disregarding the vacant time.

Kaitaia would haved to be one of the unemployment capitals in the country, etc.

Good luck to you Aussies who haven't done enough background research. I'm sure NZers will appreciate the opportunity to buy in the slump when everything comes off the boil. We will still be in the market for sure.

Happy to be corrected or updated as my aim is to learn more
Sapphire

[Dean@Massiveaction]

Re: How much is enough?

A lot of 'guru's say that cashing in for profit, at the right time, is all part of a healthy overall investment strategy.

Depends on your goals always. If you want passive income and this property is providing that and you can sleep at night with lots of debt, why sell ever??

I see too many investors sellout of properties to liquidate some equity and end up in a worse position, and for the undisciplined they often get so excited at having bucks in the bank that they blow it. If you want to retire youngish and rich, use the equity to buy another pos cash flow property. Build a portfolio, leave the capital gain for your descendants. You enjoy the income

[Felipo]

Hi Poomba,

This is all very interesting, I am arriving from Ireland to Auckland this August, my partner has a job secured with one of the telecomunications companies in Auckland. We have relations living in Hamilton and Duneden, so allthough we are pretty blind coming into the property market, we do at least have a few points of contact.

I've also been monitoring realnz.co.nz for a property to live in, I am finding 2 major issues:

1. Do not know the areas.
2. Cannot find information on property to rent.

Any suggestions?

[Dean@Massiveaction]

Hi Felipo,
Suggest you email my property manager [email protected] Her names Karla. She can help you find somewhere to rent. In terms of buying I would suggest you rent for a bit first till you do learn Auckland a bit.
We're just coming off a boom into a slump here so it will be better buying towards the end of this year anyway, and different parts of Auckland have totally different feels about them. So give yourself a bit of space. I can give you a list of "nice" areas or areas with strong capital growth potential but you might hate them!! Depending on your financial position you might have a lot of choice once you get here and glook around a bit

[kelster]

Working out an appropriate selling time is always difficult. What fascinates me about the buying and selling of property is how many say "If I had only not sold..." or "I should've bought that place 10 years ago." No PI I know has ever said "I wish I hadn't..."

[Sapphire]

For the forumites that like details, I have held one of my IP's for 12-months and if I sell now I can reap $21,000 CG before costs.

It is currently cashflow positive before tax, but the town only has a population of 950 people and my concern is that if the NZ economy takes a bad turn it will be small towns that hurt the most.

I guess if you were worried about the slow down in a small town and your ability to find a buyer if you want one, then the fact that you've made 30% gross in 12 months is pretty good, and much better return than an empty no-renter, or -ve geared if interest rates rise too much further.

If it helped me sleep at night, I would sell it. Or if I thought it had long term potential as a 'seaside resort' or proximity to a major town/city, I might keep it. It would depend on where it was.

Sapphire

[scorpio]

Hi Nobleone.
The answer to your question was answered by Poomba.
It depends on your goals and what you are wanting to achieve.
Many of us have made huge capital gains over the last 4-5 years, and can be classified as comparitively 'rich' to non investors. However rich doesnt mean 'financially free' from a job if that is what you are chasing.

Your considerations regarding your decision to hold/sell in a townsize of only 950 are relevant - however you must have rationalised them when you bought - given it was only 12 months or less ago.

I would suggest you review your goals with the view to making your decision, and not the other way around.
Good luck.

[Felipo]

[/quote]We're just coming off a boom into a slump here so it will be better buying towards the end of this year anyway, and different parts of Auckland have totally different feels about them. So give yourself a bit of space. I can give you a list of "nice" areas or areas with strong capital growth potential but you might hate them!!

Hi Poomba,

We have a substantial amount of capital at the moment as we have sold our investment in Ireland, I know that the indicators are pointing towards a slump and I'd be confident that you are more up to date on the factors that influence property prices in New Zealand. In Ireland the indicators pointed towards a slump for a considerable amount of time over the last 10 years and allthough the increase has dropped to roughly 6.5% on average per annum there was no real slump just a slowing down.

Sorry getting off the point a bit...... What we plan to do is purchase to properties with circa 50% mortgages and rent one out and live in the other. I would be greatful for any lists that you have on either nice areas or indeed areas that are having a reasonable (high) capital growth.

Does this plan seem wise to you?

I have read a lot on this site about getting your structures right, can you recommend anybody?

Thanks again

Phil