Forum Replies Created
No matter what “strategy” people recommend, or how much money/time you have to invest/risk, in order to become successful you have to be passionate about real estate and have a desire to acquire knowledge – whether through books, school, or a mentor
. I personally do not recommend seminars.Once you have gained an understanding of this profession, and the diverse investment strategies it offers, then you must decide which is the most profitable and risk adverse strategy to implement.
“what is the best strategy that will make the most money and how!”
If your focus from day one is making the “most money”, you’re setting yourself up for failure.
— Michael
The tax deferred option you refer to is a 1031 tax exchange, which I understand is only available in the United States.
Under Section 1031 of the Internal Revenue Code, some or all of the realized gain from the exchange of property may not need to be immediately recognized for tax purposes. Both properties in an exchange must be held for productive use in trade or business or for investment and must be of a like-kind.
— Michael
We specialize in a form of property syndicate [equity-based limited partnerships] which enable our clients to invest in often higher yield/shorter term transactions than they could have independently.
These people generally do not have the time to research an investment in-depth nor are they interested in any ongoing management. They are simply seeking a return on investment often as part of a diversified portfolio.
From this perspective, property syndicates can be advantageous. But, as with any investment, adequate due diligence should be conducted to ensure your funds are being appropriately distributed and managed by an experienced team.
I would not consider 9.5-11.5% yields to be worthwhile, although this may reflect a secured investment with a very low risk factor.
Whether it is “better to invest in houses/units” depends entirely on your knowledge in acquiring real estate assets, and time commitment. Do not focus solely on the “potential” capital gains.
— Michael
In my experience, lenders are not interested in a foreign entity structure. There is no security. Therefore, a New Zealand registered entity may be your only option.
In terms of entity type, you should speak with a qualified lawyer and accountant who will advise based on your proposed investment strategy, tax considerations etc.
I understand there are law changes in the works for New Zealand Trusts.
— Michael
RE: “Does this provide the ideal opportunity to invest in overseas property? By taking advantage of cheaper property prices in the US and a higher currency conversion.”
The US real estate market is [in most states] at its peak for now. Comparing the two countries, US real estate is not on average “cheaper” than in Australia.
As you may be aware, interest rates are at the lowest in many years which led to a “boom” in the housing sector [you must be a US resident to take advantage of these interest rates]. In several parts of the country this surge in sales activity and appreciating property values is continuing.
Highly leveraged financing and home equity loans are likely to result in opportunities arising in the near future. But either way, given the same amount of time and effort, you are not likely to see returns that are still prevalent in Australia, although more so in New Zealand, for the foreseeable future.
— Michael
The decline of the US dollar has been an attempt by the Federal Reserve to kickstart the US economy and manage inflation internally.
However, economic trends are leading towards a much stronger US economy in 2004 which should see the US dollar strengthen and the status quo continue.
In effect, the negative impact on exporters in Australia should subside resulting in nothing more than a short-term “bump in the road”.
In terms of the strengthening AUD, Australia is somewhat reliant upon imports and direct foreign investment – which should counteract any severe negative consequences of a weakening US dollar. Although domestic manufacturing will feel the impact, revenues increase in other sectors.
And as has been the case in New Zealand, foreign investors are expected to assist with revitalizing the Australian real estate market in the near future – which can be considered a positive or negative, however it generally benefits the real estate market and economy overall.
“Are the doomsayers correct when they suggest to us that for the time being we should hold off buying (real estate)?”
Where would we be if the “doomsayers” – or pessimists, controlled our decisions.
— Michael
RE: “If you don’t know the basics of costing you probably should not venture into development.”
Property development can be the most profitable facet of real estate, and should not be overlooked by anyone with a passion for this business – whether the person is experienced or not.
The key to success in property development is building a team of knowledgeable and experienced advisors – which will reduce risk and often increase profits.
As Michael touched on, when first starting out the day-to-day team may be limited to a project manager. As the projects become more complex, the team you rely upon will become more complex.
There are of course costs involved when incorporating professionals, however any feasible development [from the lenders perspective] will absorb these costs. Or a cost-effective option may be an equity arrangement with a key professional
, which can be done on a project-by-project basis.My point in response to the statement above is property development can be very risky, and does require a level of knowledge and experience. But the person with the idea/concept should not be discouraged because they lack this experience – although it would appear this was not Michael Yardney’s intention.
— Michael
Building Industry Associations often produce annual publications which outline the cost of labor, materials etc per square meter/foot for specific regions.
I am aware Rawlinsons offers a periodic construction handbook for New Zealand, it may be worth contacting them to find out if a similar publication is available in Australia.
[www.rawlinsons.co.nz/handbook.htm]
Alternatively, contact a local construction firm and/or quantity surveyor who may provide this information.
— Michael
Because I am not located in Australia I am not privy to lawyers or other professionals qualified in lease options.
What I suggest is submitting another post asking others to refer someone. I would recommend asking for references, or conducting some form of due diligence before proceeding – to ensure the lawyer has sufficient experience in lease option transactions.
— Michael
Student accommodation is certainly an emerging and profitable sector in New Zealand, specifically Dunedin. Although I am not involved in this sector, I know of several investors who have found it to be very profitable.
Market data we have received suggests Otago [Queenstown, Wanaka, Dunedin etc] is predicted to continue its “boom” cycle for at least another two years which reflects supply/demand.
Dunedin itself has experienced very good growth in the past 12 months – median SFH sale Dec 02 was $116K, in Dec 03 $164K [or +~42%]
In terms of institutional lenders, we spent considerable time reviewing banks in New Zealand. The best and most flexible we found is ASB Bank [www.asbbank.co.nz], whether you are a foreign or local investor.
If you have security where the loan originates i.e. equity or otherwise, the banks are willing to lend funds. Especially New Zealand at this time due to the short-term forecast appreciation of land/property values.
— Michael
Chan$
Although I don’t deal in industrial property, I understand the difference is minimal.
Industrial tentants are generally longer term, and often have to comply with enviromental/local government regulations which do not apply to commercial tenants. Because of this, they can be more costly to secure in terms of T/I and/or meeting regulatory requirements.
The industrial sector is also more cyclical, where commercial tenants are generally more effected by the economy.
From an IP perspective, the objective is the same – limit risk and maximize ROI.
— Michael
Commercial property can offer higher returns versus residential, but the up-front cost can be substantial in order to secure and retain a quality tentant [T/I or “tenant improvements”] – this is often influenced by supply/demand.
Commercial is also more of a numbers game than residential. Costs/profits are generally measured on a square foot/meter basis, with several scenarios available for managing overheads.
It pays to have an understanding of economic/market conditions that may influence tenants/demand. Unlike residential where [almost] everyone needs somewhere to live, many businesses, specifically smaller operations, don’t necessarily need a commercial space when faced with difficult times.
And you will generally pay more for a commercial property, which will be factored into the equation if comparing with residential. Although, in many cases commerical does offer a ground lease option which can be cost effective and increase your ROR [rate of return].
— Michael
I enjoyed your response, but I was not so concerned with the technical aspects, as outlining a fundamental consideration for someone who it appears may not have much experience in the formation of partnerships/joint ventures or otherwise.
If you refer to my original post you will see I was not critical of [or concerned with] the structure itself, rather your comment re: liability issues, and how this can be avoided.
“the “entity” can either be a person or a company.”
With all due respect, I think it was clear what I was referring too.
“I think we (or more precisely, I!) may be splitting hairs”
Yes, there is no point confusing anyone. The key points I think we are trying to make are 1. select the appropriate entity type 2. ensure a formal agreement is in place to protect the interests of all concerned.
Both steps should be discussed with qualified legal counsel.
— Michael
To clarify my feedback, a “partnership”, “joint venture” or “operating” agreement [fundamentally one in the same] should be structured to protect the partner’s interests.
This is seperate to the entity itself – it does not matter whether the entity is a LLC, unit trust, limited partnership or otherwise, the agreement includes the operating parameters of the partnership/company and legal considerations.
“technicalities rarely work in real life. The circumstance in which you’d be arguing that technicality will more than likely be in the courts”
Partnership/Operating Agreements are the foundation of my business. To date neither myself or any partner/investor has required court intervention, or been subject to liability proceedings – because of the agreements we put in place.
My point being, no matter whether the partnership is 2 or 20 people, conducting $10K or $10M transactions, it is recommended that an agreement is prepared to protect each parties interest moving forward.
Not having an agreement increases risk significantly, and will potentially result in legal proceedings.
— Michael
This statement is not necessarily accurate..
“At law, each partner is able to legally bind all other partners with their actions, even though the other partners aren’t aware of the obligation or liability. VERY DANGEROUS!”
Whether you form a trust or other entity, you should have a joint venture/partnership agreement which details each partners role, procedures, legal considerations, etc.
Any competent legal counsel can prepare an agreement which will restrict all partners from making decisions or conducting transactions etc, that can adversely effect the partnership or people involved.
— Michael
There are no set parameters for a lease option, meaning you should outline what is affordable, and considered fair for both parties, and submit an offer to the property owner.
Although it is common for the rent payment to increase, the difference is generally applied toward your down payment. To protect this investment you can include a condition in your offer which requires these funds to be repaid if you do not exercise the option.
In terms of percentage [increase in rent], again make an offer that you consider financially viable.
As for the offer being over market/capital valuation, make an offer more in line with today’s valuation, or slightly under – as a starting point. You may find the owner will accept your valuation.
The key is ensuring the property’s valuation will continue to appreciate during the lease period. If your situation changes, you retain control of the property and can then on-sell to a third party, exercising the option with the original owner and profiting accordingly.
My recommendation would be to find an attorney or other professional experienced in preparing lease option agreements as there are a number of factors to take into consideration, in terms of protecting your interest and maximizing the value of the transaction.
The benefit of presenting the property owner with a lease option is you have nothing to lose. It may be declined, but the owner is aware you have an interest in acquiring the property, and if his/her situation changes in the future, you may find the offer is accepted.
— Michael
This comment sums up the difference between attaining wealth or a comfortable living..
“It is the capital growth that makes people rich, not the income.” [Terryw]
Why set your goal at $1M in 5-7 years – aim for accumulating wealth at $1M+ per annum from year five. If the investment strategy you have outlined is successful, this is a very realistic objective.
— Michael
Julian
In response to your comment below, at this time the two countries are independent in terms of tax policies meaning funds returned to Australia would be subject to CGT.
This policy is not likely to change in the foreseeable future. New Zealand would in effect have to become a state of Australia, which implies New Zealanders would then incur CGT.
For some time the New Zealand government has considered its own CGT [which may effect your due diligence] however at this time they appear to understand the negative impact this would have on [much needed] direct foreign investment – even with double-tax agreements in place.
— Michael
“as NZ and Australia have fairly open reciprical rights for its peoples working and living in each other’s country, you could (I believe) quite easily return to live in Australia (after a time) yet not be forced to pay capital gains tax on moneys earned in NZ when taking those funds to Australia.”
I would agree with Julian’s comments re: investing in New Zealand, which we have been monitoring and investing in for some time.
In terms of taxes and foreign investment policies, this location is not complicated, especially if you originate in Australia.
However, although New Zealand does not have CGT, capital gains tax does apply on income/capital gains derived overseas [in Australia].
— Michael
Because land options generally enable the developer to “control” a site for an extended period prior to settlement, the contract “may” have to reward the vendor – which can be as simple as agreeing to pay the asking price.
An option is a formal agreement between the buyer [developer] and seller [vendor] subject to specific conditions.
From a developers perspective, these conditions will often include planning approval; engineers report; finance; and dependent upon the project, subject to selling/leasing all or a percentage of the proposed development OTP [“off-the plans”].
Upon entering an agreement with the vendor, the developer will generally submit a deposit [5-10%] which is held in an escrow/trust account. The developer will often negotiate terms whereby the deposit is refunded in full if the conditions of contract are not satisfied.
However, the developer will have no recourse on capital invested during the “due diligence/evaluation” phase, which will be lost if the conditions are not met and option is not exercised. This can be costly.
In terms of on-selling land before settlement, this could be a condition agreed too with the vendor – included in the agreement.
Otherwise, you may enter another agreement with a third party [or multiple parties] subject to the transaction meeting the abovementioned [or other] conditions. In effect, the third party would finance the amount payable to the vendor on closing, and you would retain any profit [or loss] over and above the original purchase price.
The “approach” is no different from demonstrating an interest in buying any property. The key is conducting an interim evaluation of the property [do your homework] and preparing an offer that makes sense to all concerned.
There is no “format” as such because a different set of terms and conditions can apply to every transaction. I would advise that a qualified lawyer prepare all documentation.
— Michael
