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You might need an equity partner? 50% of something is better than 100% of nothing
Cheers
JeffThe positive cash flow properties will be right under your nose as Dazzling has pointed out.
Are you restricting yourself by placing certain parameters on you buying eg price.?
Are you looking at alternatives to add to the cashflow?
If the deal is good, no matter what price and whether you can afford it or not, it will be worth something to someone.
If you understand where I’m coming from your’e heading in the right direction. Just don’t be lazy with your searching. No astute investor is going to hand you something on a plate.
Cheers
Jeffpr
You could try http://www.quotable.co.nz
This site gives a free national demographic profile but you have to pay a few dollars for a localised one.The other site is http://www.stats.govt.nz the last census was 2001, the next is 2006
Cheers
JeffOriginally posted by grego:Why convert to industrial asap? Is there better resale value for land that size when sold as a business compared to as a residential house? I will pay what the vendor is asking once i figure out how this zoning issue may affect it…
I just prefer dealing directly with businesses that have a vested interest in keeping the property in good order. They tend to be longer term, pay the outgoings and look after the property.
I would convert as soon as I saw an opportunity to add value. There are also many businesses that require offices in industrial locations. If the property is strategically placed and there is a shortage of industrial space then you may do alright.
Think outside the square
Cheers
JeffYes Grego I would. An important factor to me would be the land content because I would be looking to convert the property to industrial when I could.
Leaving it as residential may cause some problems depending on the type of industry close by (noise, odours).
You would have to assess the pros and cons of the particular property and have a plan in place to get the most value.
Cheers
JeffCommercial property in smaller regional towns can be extremely lucrative. The yields tend to be better than in the major cities so positive cash flow is more easily achievable however, capital gains may not be as good.
Location is still important and high street or highway locations will generally perform better than the properties one block back.
Also of great importance is how you value the property. I tend to look for under rented properties and then base my purchase price on actual rents rather than potential rents. You will need to make rental comparisons (rate per square metre) in order to get a feel for the market rates.
You will also find that National and even International tenants still occupy commercial buildings outside of major cities eg oil companies, agricultural companies, super markets etc.
P.S. I would be interested to hear if anybody else has a petrol station?Yes Matt, I own a number of service stations in different locations around NZ. I have just sold one for $560k in a town of 4000 people – rent $55k plus outgoings. I considered it, over rented.
I tend to favour service stations, probably because of my earlier career path. I’m happy to exchange notes.
Cheers
JeffYou might get it cheaper, I don’t think those towers in the background are there anymore.
Jeff
Michael,
My reference was only to this comment and the fact that money can be made by positive cash flow alone, hence my example.
Cash flow is only really of concern when you’re looking at servicability. You won’t make your millions out of five bucks a week on $20K down. Its the CG where you make your bucks, and the WHOLE market is headed for a prolonged period of stagnation.
Capital Gain has an exponential effect on IRR. It’s fantastic. However, what do you do when “the WHOLE market is headed for a prolonged period of stagnation”?
??Put your money in the bank???
Cheers
JeffAs I said Michael, it was a raw example. But if the price dropped to $80k would that not be a capital loss of $20k no matter which strategy you used.
Why is it that we apply one scenario for one strategy and a reverse scenario for the other strategy.
For $2m you could buy a service station leased to an oil company or a motel on a 20 year lease. Long term guaranteed cash flow, regular rent reviews, ratchet clauses, low maintenance. It beats buying a vacant block and waiting for the capital gain to kick in.
Cheers
JeffMy point is that a 2% net yield on money employed will not cover your cost of capital. That isn’t even keeping up with inflation, so in real terms you’re going backwards.Let me explain my raw example:
Purch Price $100k
Deposit 20k
Loan 80k @ 7%
Interest 5600
Net Rental 9000
Net Surplus 3400$3400 / $20000 = 17% which far exceeds inflation and bank rates. Then take into account depreciation and other non-cash deductible allowances and the internal rate of return is even greater. Capital gain is a bonus if your figures are done correctly in the first place.
Through cross collateralisation the property could be 100% financed giving a net surplus of $4000.I know this is not much but given the available equity apply these principles to a $2m property and you’ve just added $40k a year onto your income. That $40k is then applied to more cash flow positive properties. Its making money from”other people’s money” (OPM), wholesale rate plus retail margin.
Steve is doing this with his wraps, the banks do this with their lending spreads, the grocer does it with his fruit and veges.
I’m all for Capital Gain but my point was you can get wealthy on cash flows alone.
Cheers
JeffOriginally posted by Michael Whyte:Cash flow is only really of concern when you’re looking at servicability.
Sorry Michael, I can’t agree with you here. Buying on a 9% yield and borrowing 80% at 7% gives you 2% on everything you borrow. It’s this variance which provides us with excessive returns on capital employed.
Sure, you have to factor in possible interest rate rises that may (will) occur after a fixed rate period, and also a vacancy if it was to occur. In commercial property, which det has also considered, there is generally a lease term, set rent, market or CPI reviews etc etc
You won’t make your millions out of five bucks a week on $20K down. Its the CG where you make your bucks, and the WHOLE market is headed for a prolonged period of stagnation.I agree your example would not make you millions but don’t rule out the cashflow thing, it can be found and locked in, in any market. If you have to rely solely on Capital Gain then you either need to have all the capital in the first place or a good alternative source of disposable income to service any finance. But also remember that CG can be created, you don’t have to wait for the cycle.
Cheers
JeffAuckland’s population is more than 25% of the total population of NZ. It also has a large immigrant base probably because it’s the first port of call.
Both rents and house prices tend to fluctuate there more than most other parts of NZ. In Monday’s NZ Herald there was a report of rents falling sharply in many parts of Auckland eg Takapuna/Milford 23%, Sandringham 20%, Ponsonby, Herne Bay 13% and Remuera 11%. (allbeit the more affluent suburbs of Auckland)
The BNZ Economist, Tony Alexander quotes in his weekly overview, “With housing demand growth easing as population growth slows down while supply is rising at its fastest rate in 30 years there is an over-supply of rental accommodation appearing now which will eventually have implications not just for rents but for prices investors will be prepared to pay”
I would suggest being weary of investing in apartments/units in Auckland although I still believe there is a bargain in every market.
Cheers
JeffThere’s a book by Martin Roth and Chris LAng titled “How Investing in Commercial Property Really Works”. It is well worth a read.
I have found that the majority of serious property investors are involved in Commercial Property, residential is usually only a stepping stone.
With commercial you need to be able to resolve problems and cater for the needs of your tenants. If the tenants can make money in their business, you will make money. It is extremely rewarding when a business thrives and the tenant asks you to extend the building for them to accommodate their growth.
Cheers
JeffPick up a book titled “The E Myth” by Michael Gerber. After reading the first couple of chapters you’ll decide whether or not to sell your business.
Cheers
JeffHi JPD,
I personally know nothing about horses other than my annual bet on the Melbourne Cup however, my sister in law and her husband have done exactly what you are proposing on a 13 acre block just north of Auckland NZ.In their plan they built an arena, and 6 stables to complement the grazing. For stabled horses they get more per week and of course, additional for feed. They also charge about $25 to $30 for riding/exercising the horses. It’s generally a full house where they are but I couldn’t tell you whether it’s working financially or not for them, they’re big spenders.
Cheers
JeffJust sold a property in Putaruru (near Tok) for $10k more than the asking price – an unconditional offer from an “A.W.” as Mini describes them.
Watch out Muppet the Jafa’s are coming
Cheers
JeffHi all,
Just a quick update on the project. We are still going through the regulatory process before any works can actually start.
In NZ there is this undesirable piece of legislation called the Resource Management Act (RMA) which has to be satisfied, together with building compliance, fire, health and disability requirements. Our designer is working on the most feasible plan without opening a can of worms.
We will begin gutting some of the rooms in one wing this week and then paint, carpet, bathroom fittings and furtniture will go in. We have to provide facilities and wheel chair access for the disabled and will have to remove part of the building to construct an enclosed stair well and reception area.
A new hot water system is required, smoke detectors and possibly an upgrade of the sprinkler system.
Providing this meets with Council approval we will then have to put in self catering kitchen facilities, internet kiosk, communal entertainment area, maybe even a swimming pool. The list goes on.
Once our plans are approved we should get completed quite quickly. We hope to be at least operational by the end of May for the Lions Rugby Tour
BTW we haven’t chosen a name yet. I’m gathering a list of possibilities so we can fit it to our overall marketing plan – every suggestion helps.
Cheers
JeffIt is common for sums of money to be held in a solicitors trust account subject to completion of works etc.
I personally would want the monies held in “my” solicitors trust account and not the vendors solicitor.
The amount should be inflated to cover the maximum amount required to complete any necessary works. This provides an incentive for the vendor to do something about it.
Check if your contract contains a default interest clause. If one party cannot settle as per the contract there is a provision to charge default interest until the terms of the contract are complete.
Another suggestion is to use this problem to discount the purchase price. Last year I managed to discount the price of a building by $10k because of a leaking roof – it cost me $500 to fix.
Cheers
JeffWhat about building to provide additional cashflow?
Have you explored the different types of dwellings you can put on this property, the costs of building to completion and what sort of cash flows can be generated?
It’s worth doing some more homework.
Cheers
JeffYou don’t know if you’ve got a good one until you have to claim.
You can use a broker however, some companies such as AMI do not use brokers and tend to be a little cheaper. They also have limited cover for loss of rents and maliscious damage by tenants.
There only seems to be about 4 major insurance companies underwriting the cover in NZ these days so has become less competitive.
If you go into AMI’s website or even State Insurance or NZI you can usually get an online quote.
Hope this helps. BTW, I use a broker.
Cheers
Jeff
