Do you get excited about the next 'hot' areas?

19 July 2018

Do you get excited about the next 'hot' areas?
 

I actually hate all the media comments about this area is booming, or that area is booming.  It generally distracts property investors into a short term mind-set rather than focusing on their long term strategy.  Obviously, some investors can make great money jumping from place to place, buying at the bottom of the market, having the area jump in value, and then selling to crystalise their gain (note: this is really speculators, not investors).  But many investors also don't; they generally jump into the area too late, haven't fully researched the area, have issues, and end up selling and losing money.
 
My main issue:  there is no long term planning or strategy.  It is just about jumping into an area that is supposedly booming and hoping it jumps in value.

Some strategies that could be considered:

• Buying cashflow and using the cashflow to pay down the debt, ending with a debt free rental property after 25-30 years. Need to carefully look at the cashflow and is 8% or 9% gross yield actually enough to achieve this?  Probably not!  Also, what happens if interest rates rise slightly?  A major issue is that rates, insurance, and repairs can be very high compared to the rent, meaning that a high gross yield can still be negative overall cashflow.
• If you have great income and no personal house debt, an obvious easy strategy is to use your high incomes to pay down the rental debt and end up with a debt free rental property giving passive income.
• My favourite -  can you add value?  Can you subdivide and end up with 2-3 rental properties, with substantial equity gain and improvement in cashflow?  Or can you add a minor dwelling, add a bedroom, convert a lounge into a bedroom, convert a garage into a sleep out, or just do a smart renovation?
• Buying at a discount obviously helps with cashflow as less interest.

A standard strategy used by a lot of property investors is to buy two rentals, hope they double in value over say 10 years, then sell one rental, so that you are left with one rental which is debt free, creating passive income.    The issue with a lot of the smaller areas is that this might not come true and there might not be the capital gains needed to make this strategy work!   After the last boom, a lot of smaller areas in New Zealand actually lost value – how would this affect you if you are relying on capital growth for your model to work?
 
Lastly, there are costs to having a short term focus, such as possible tax on gains, commission, legal fees, and/or break fees.
  
Hopefully this has got you thinking a bit about what you really want from investing in property?  And what is your strategy to achieve this?


Kind regards
 
Ross Barnett

Lessons from the Last Boom/Peak

28 August 2018

Reminder: Provisional Tax is due today (28/8/18) for most provisional tax payers.

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LESSONS FROM THE LAST BOOM/PEAK

In a normal cycle, Auckland booms, then Hamilton/Tauranga follow, then other regions follow after that.

Over time, Auckland flattens or goes backwards.  Hamilton/Tauranga then flatten or go backwards and the other regions follow after that.





 

Don't get carried away with the media and the property market!

It can come down!  Buying on or near the top of the market has added risk!

• There is no buffer if the market comes back a little.
• Your interest costs are higher as you have paid more.

Example 1 – Built in 2007/2008
Cost $520,000
Losing $8,000 per year in cash flow
Had to sell 2014
Sold $425,000
 
TOTAL LOSS = $150,000 approx!
 
 
Example 2 – Purchased new late 2008
Cost $335,000
Losing $9,000 per year in cash flow
Had to sell early 2015
Sold $300,000
 
TOTAL LOSS = $98,000


I recommend being very careful if buying at the moment.  Make sure you have a clear strategy and a buffer for extra costs or if interest rates go up. 
 
I would personally only buy if the property was cash flow neutral or better, or if I had a strategy to add equity and long term turn the rental positive, such as sub-dividable.
 
Otherwise you are gambling on prices going up – They may do, or they could go down too!



CASH FLOW IS KING!!!
 


For both of the above examples where property investors lost money, the properties were very negative and costing a lot of cash each year.

While we always hope everything goes well, if things go badly and you get sick, or lose a job, then funding negative rentals can be very hard!
 
If you are buying long term rentals at the moment, I feel you need to be buying a property that is neutral at worst, or else negative at the moment but you have a short term plan to convert this loss into a profit.  By subdividing, or adding a minor dwelling, for example, or paying down large amounts on the mortgage.


 
COMPLETE PROJECTS
 
I hear all the time, that “we can add a minor dwelling later to improve cashflow”, or “we can subdivide this long term and sell the section to improve cashflow”, or similar comments that there is a project that can be completed to improve cashflow.
 
After the last boom in late 2007, the banks changed their lending criteria and made it a lot harder for investors to borrow.  Therefore, a lot of investors who had these possible projects, could no longer get the finance to do them.  So rather than having a house, with a minor dwelling making cash each year, they were left with a negative rental that was dragging them down.
 
If you have possible projects that can improve your cashflow, I suggest you try to finish them now.


INTEREST RATES – Don’t put all your eggs in one basket!
 
No one has a crystal ball, and no one knows what will happen with interest rates.  Everyone is guessing.
 
Therefore, I generally suggest using a spreading approach and have some loans short term, some medium, and some long.  The idea is to ‘not’ have all your loans coming up for renewal at the same time, otherwise if rates change all your loans could be affected.
 
With a spreading approach to interest rates, you win whether rates go up or down!


BUYING OPPORTUNITY
 
When the market peaked in late 2007, there were quite a few buyers who had stretched themselves too far.  As property prices failed to go up over the next year or so, these buyers became more under pressure as they were putting in cash each week to top up their negative cashflow properties, but not getting the capital gains they needed.  Last boom it seemed to take 2-4 years for these buyers to get further and further in trouble, and then finally to sell when they were desperate. 
 
Therefore, there was great buying around 2009 to 2011, when there were quite a few desperate vendors in the market.
 
If you think the market will crash, or even go flat for a number of years as it did 2007 to 2014 (Rest of New Zealand excluding Auckland), then a good strategy can be to wait for 2-4 years after the boom and try to find some bargains.
 
I hope you found this useful.
 
 
Kind regards
Ross Barnett 

Do You Need A Trust?

10 July 2018

Do You Need A Trust?

In my opinion, asset protection and Trusts are becoming more important for property investors.
 

• Property investors are establishing more and more equity.  The more equity you have, the more you could potentially lose in a worst case scenario!
• The risk of being liable for Health and Safety is higher, and likely to become higher in the future.
• With ring fencing likely to be introduced in the near future (it seems certain to come in, we just don’t know the when or whether it will be implemented over a number of years), losses from a rental are likely to be treated the same as Trusts are currently treated.

It’s important to consider your possible risks and the assets you have at stake.
 
Some options that can be done:
 

• Personal house into a Trust – likely to be no tax effect as long as true personal home, but make sure it is predominately the personal home if affected by the 2 or 5 year Brightline test!  This could protect your personal house at least, in a relatively easy manner.
• LTC  -  change shareholding to a Trust – make sure you get expert advice as there can be catches, such as making building depreciation recoverable or triggering the Brightline test!
• Sell rentals to a Trust – this is likely to incur more legal costs, trigger building depreciation recovery plus restart the Brightline test period.
  • -  If you are/were a trader or developer, or a builder, a sale can have more tax implications that need to be carefully checked.

Trustee options  

1.  Old fashioned – Mum, Dad and third independent person.  If using a lawyer or accountant, they are more likely to use a Trustee Company to act as the Trustee. 

2.  Slightly better, in my opinion – Mum, Dad and company specifically set up to be their trustee.  Might have accountant or lawyer as director and shareholder, but if wanted to change in the future, could just change director and shareholder, but titles and mortgages stay the same, so cheaper to change around.

3.  Variation on Point 2) – One corporate trustee.  This is one company acting as trustee.  Might have Mum and Dad as directors, and shares split in 3, with third independent person holding over 25% of shares.  This then gives some independence by the third person being required to approve all major transactions.

 
This article might also help you!  https://www.cswaikato.co.nz/index.php/latest-news-accounting-hamilton/accountants-hamilton-auckland/161


Kind regards
Ross Barnett