Forum Replies Created
What data and investment strategy was used to determine 20 percent “capital growth” – which I assume is annual growth?
How many properties have you acquired in Manchester? and how many have demonstrated an average CG of 20 percent per annum over the past 3 years?
A couple of points of interest re: UK residential market:
Nationally, the typical rates of return on the cash purchase of a buy-to-let investment, including both rental yield and capital appreciation and taking void periods into account, range between 6 and 10 percent.
Foreign investors interested in the UK residential market should follow these principles:
Borrowings should not exceed 70 percent of the property’s value; rents should equal or exceed 150 percent of mortgage payments to allow for maintenance and other costs; and a reserve equal to at least 2 month’s mortgage payment should be allocated to cover any voids.
— Michael
P.S. are you promoting properties you have lined up to people on this forum?
The following statement may not reflect the best strategy when borrowing against equity.
“treat the 20% drawdown as a cash deposit when doing your calculations. You are limited to how much equity you can draw down from other properties”
— When borrowing against equity retained in another property
, often the best strategy is to not “draw down” cash. Instead “borrow against the equity”, which is the banks/lenders security.“Whether you’re using cash as a deposit, or using equity from existing IP’s, it’s the same.”
— This is not accurate – for a number of reasons.
“borrowing from existing equity is still borrowing, so it’s not really “putting no money down”.”
— Either strategy is a form of borrowing, but only a “cash” investment is putting “money down”.
Let me use one example of how equity combined with capital growth outperforms cash from an investment [net worth] perspective.
I met someone in mid 2002 who had a passion for real estate investment but only $5,000 in the bank to invest.
I explained the theory of how to create wealth with “no money down” – or a minimal cash investment to get underway – using equity. We have since remained in contact.
Today this person has a net worth in excess of $2 million. His total cash investment was $5,000.
The COCR is infinite if there was no cash investment and income derived is sufficient to meet outgoings.
— Michael
I have experience in this type of structure.
“pretty safe bet”
Firstly, you should do your homework before acquiring property based on someones “guarantee” that the investment will generate XYZ income over a defined period. And employ a very good contract lawyer.
There is always a catch or clause to protect the seller/lessor.
“the resident managers guaranteeing your rent for the term of the lease”
I assume you mean they will guarantee an annual return [in percentage terms], or a portion of the projected income based on periodic occupancy adjustments – I have used these sales strategies in the past to ensure the buyer does in fact generate a percentage of their cost over a defined period.
If they are “guaranteeing” income sufficient to cover your lease payments, then this is enough of a red flag to walk away and not waste your time.
WHEN A DEAL SOUNDS TOO GOOD TO BE TRUE, IT USUALLY IS.
Furthermore, in a lease arrangement [specifically motels] you have to ensure your investment is protected if the owner sells the property. In many cases, if the owner wishes to sell the property to a developer, for example, the lease is terminated with little or no remuneration for the lessee – unless it is clearly stated in the lease agreement.
Hotels, motels – any accommodation business is more reliant on “location” than any other type of real estate investment. This extends beyond close to the beach, for example, to understanding the effects of adjacent properties; future development; access points – i.e. is there easy access to and from the property from a main road; “quiet enjoyment”; attractions – reasons people visit the location; seasonal adjustments; economic factors.
The location you are referring too may be perfect on the surface, but you need to account for the above and more when considering an investment in an accommodation property, especially if reliant upon guaranteed income.
You may find with enough research that the deal is a diamond in the rough – there are reasonable reasons why the income is guaranteed. Don’t be afraid to ask questions.
Talk to business/home owners in close proximity – who will generally have a good idea how the motel performs and the type of clientele it attracts.
Most importantly, look at the historic occupancy figures and request a copy. If you cannot retain a copy, then this should be a reason alone to look elsewhere.
— Michael
Hello Westan
RE: “What we have been seeing at the cheaper end of the market is it is rising at about the same rate as the middle of the market so if a home for 100k rises 20k we are seeing the cheaper end say 70k move 20k also. so as a % return it actually outperforms the higher priced property”
— I certainly agree, although I do not deal in SFH’s this is a trend we have also identified in New Zealand at this time, in terms of land values.
You are correct, one should not focus on buying the more expensive property – from an investment perspective – instead purchase the property which demonstrates the highest capital growth over a defined period.
RE: “it is actually quite common to find high yeilding properties that outperform the so called capital growth areas…
this is posible because a lot of smaller areas are/have been undervalued for a long time and overlooked”
— The yield is generally a reflection of the location combined with the properties net worth. I do not doubt that in some “overlooked” markets the yield is outperforming CG.
But my point was, it is not often a positive geared property will outperform a negative geared – if the buyer has done his/her homework.
Generally a negative geared property is reliant upon capital growth in order to demonstrate a ROR. This rate should clearly outperform potential yields + CG [+ve geared property], or it may not be a good investment.
— Michael
“the question is faulty”.. “you don’t have to have growth or cash flow, you can have both”
— The question assumes property will not generate capital growth over the desired holding period.
It is true that all property will appreciate in value over time, but there are locations where this cycle stagnates or is reversed for a period of time, due to economic or other reasons.
I am sure no-one will argue that a negative geared property generating 5% CG is a better investment than one offering 10% return and 7% CG.
Although, it is not often you will find a positive geared property outperforming a negative geared in terms of capital growth – this should be a red flag.
My preference for negative geared property is based on a short-term holding period [at times no more than a few hours, other times a year or more] and high capital growth rate.
“Demand” is the driving factor behind these transactions. “Due diligence” and understanding the market is the key to success.
My point being, if there is too much focus on positive cash flow and holding long-term, often the most lucrative investments are being overlooked – as is the ability to create true wealth – real estate investment is all about “leverage”.
[“calculated”] Risk = Reward
— Michael
“I do not believe there is such a thing as no capital growth potential. The world has an increasing population.”
— Agree. Time dictates capital growth – the key is selecting a location which clearly demonstrates growth during your desired holding period.
“the NZ government has deliberately slowed immigration to cut down the number of people who are allowed to enter NZ – to try and slow down the housing market!!!”
— Not correct. From a foreign investment perspective, New Zealand remains one of the easiest countries to acquire and own property – especially for the smaller investor.
There is an attempt to slow down immigration for political reasons unrealted to the real estate market.
“brand new apartments.. they’re overcapitalised from the get-go”
— Demand dictates if an apartment, or any property, is purchased for more than its market valuation – supply and demand dictates the market.
It is not often the apartment is overvalued at time of purchase, it’s the purchasers inability to foresee oversupply, market corrections, avoid buying on emotion – and service payments – which can result in short-term losses.
“bugger all land value to make the property hold it’s value, and ever increasing strata fees.”
— “Land value” does not necessarily dictate “market value” like it once did.
As you have highlighted, “the world has an increasing population”. This factor combined with “convenience” and “low maintenance” has resulted in a significant increase in demand for apartment living worldwide – which can only continue.
Land will always play into the equation, but in many metropolitan locations land is simply unobtainable. Apartments satisfy supply [limited land] and demand [convenient “waterfront, central, high-rise” living] at an often affordable cost.
As for “strata fees” these are nothing more than a minimal expense for maintaining the property.
Those who question strata fees do not consider the even higher cost of maintaining a SFH, for example.
I am not defending apartments – in fact I am generally appalled by the low standard “shoe boxes” that are commonly constructed in an attempt to maximize profit – in Auckland, Sydney and Melbourne, for example.
Demand for apartments is only going to continue, therefore I would not consider this segment a bad investment across the board [short-term or otherwise]. The key is doing your homework to ensure supply will not adversely effect the investment, and demand will continue.
— Michael
I have never liked the term “crash” – because it exacerbates what is simply a market “adjustment”.
Having read the responses to this post there are two points I wanted to touch on.
1. A savvy investor will only buy a property once “potential market adjustments” have been taken into account.
Historic data should be used to determine worst case scenarios in recent years, i.e. 5 to 10 years, then a conservative approach taken to determine future trends.
In addition, an “exit strategy” should always be accounted for prior to investment, i.e. if the market downturn is greater than expected – often due to personal, statutory or severe economic reasons, not typical supply and demand.
2. Market “crash” equals “opportunity”.
For example, and as noted in several responses to this post, many people are currently leveraged beyond their means – especially in Australia, New Zealand and the United States at this time.
It is likely the majority of recent home/property owners are not savvy investors and therefore did not account for short-term market adjustments. They have acquired property on the basis of emotion and/or social trends – or borrowed against equity due to low interest rates.
It is almost inevitable that there will be a downward adjustment in specific regions of New Zealand in the short-term – Australia and the United States are already experiencing this.
As a result, opportunities will soon arise for those who did their homework prior to investing in current real estate holdings – and have positioned themselves to capitalize on such opportunities.
The moral of this story being, the real estate market can be lucrative no matter what direction it is heading. The key to success and indepedent wealth is investing with this in mind.
— Michael
In response to the following:
“have a large amount of money and are willing to travel and set up corporations”
No more money is necessarily needed to invest in the US or Canada than is required in Australia or New Zealand, the question is how do you leverage the investment if required, i.e. institutional funds, and obtain legal rights to acquire the property.
A “corporation” is not “required” or the best vehicle for acquiring and owning property. The most beneficial, flexible and cost adverse entity is a LLC [Limited Liability Company].
However, in order to establish an LLC – or any corporate entity in the US, you require a social security number – and therefore must be a permanent resident or citizen. Alternatively, if you have a trustworthy relationship with a resident or citizen, a partnership can be entered into in order to form the LLC.
The above assumes you need to leverage a bank or other lender in the US, otherwise, there are ways to acquire property in the US and Cananda – although I am not as familiar with Canadian law – if you finance by way of equity/assets in your country of origin, cash reserves, or a combination.
“I would encourage you to buy at least one here so you can get a feeling for investing”
Am I missing something, or did Henry say he is “not totally new to property”.
My point being, buying 1 or 100 properties in Australia/New Zealand will not necessarily be an advantage. The US real estate market is logistically quite different, in terms of tax and legal considerations, needless to say the size of the market and many economic variables that come into play.
“rather than trying to chase low interest rates”
True – there is a reason why every real estate investor in the world is not clammering to buy property in the US or Canada, eventhough these countries offer low to moderate interest rates.
“travelling costs could kill any rental return.”
Not necessarily true – this is why property managers were created. If the investment does not stack up, taking property management and other professional services [legal, accountant] into consideration, it would not be worth your time.
“you will have to set up a corpoation”
Incorrect.
“[you] will have to study tax agreements between the US and Aust”
Gaining an understanding of “double-tax agreements” should take no more than an hour or two, but of course, a qualified accountant would manage this aspect of any cross border transaction. Again, a cost that needs to be taken into consideration. A cross border accountant may also be required at the North American end.
My recommendation to anyone interested in investing in the US – in particular, is do not approach this market on a small scale when located offshore, i.e. pick up one [SFH] property, then plan on another several months or a year later.
This is even more prevalent if you have to establish legal means of acquiring the property and/or are not 100% confident the capital growth will significantly outperform an investment in your own country.
If this “small scale” strategy is preferred, the risks and costs can be significantly lower – counteracting the lower interest rates – if the same method is applied in Australia or New Zealand.
— Michael
My investment strategy is simple, capital growth comes first and foremost – otherwise I walk away.
In simplistic terms the reason why properties demonstrate capital growth, and others “at a much lower price” with no capital growth potential do not, is supply and demand.
[a] suggests there is demand for the property/location, which is likely to continue – suggests there is not.
Demand for a property/location equals “options” aside from passive income.
If there is a market downturn, both properties – if in close proximity [the same market] – are likely to be adversely effected. [a] at a lesser rate.
If the market appreciates and/or demand increases, the property offering higher capital growth will generally be the most lucrative.
This is a very simple analogy which would be subject to a number of considerations.
— Michael
“I think there are many people who have no idea what they’d do with $30M”
Turn it into a billion dollars.
— Michael
This post [discussion] is getting off track. It does not appear anyone has an issue with Marc’s signature, rather the content of his replies, and I might, overall arrogance.
I found this comment quite amusing..
[Marc] “I rather share some knowledge that may be useful to you in your next bargaining situation”
What “knowledge” or even constructive discussion? Based on his input to date I would not have Marc anywhere near the negotiating table, let alone involved in any business transaction.
— Michael
Reverting back to the original post – an interesting scenario and debate.
Personally I am not the type to let emotion stand in the way of any business decision. But in saying this, I have learned over the years that there are certain deals you walk away from for moral or other reasons.
I would walk on this deal if I felt the family would benefit more in terms of security than I would from an investment perspective.
— Michael
P.S. Marc – if you want to preach and try and position yourself on some higher moral ground – do it somewhere else. Otherwise stick to the topic.
This is the most valid point..
“Once you imagine something and then start living it in your mind then you will be able to find ways of achieving it.”
— Michael
The markets I have highlighted offer a lot of potential in terms of capital gains. But in saying this, you may have found comparable [or better] opportunities in Hamilton.
The New Zealand market is in an interesting cycle due predominantly to foreign interest and investment – and it is considered a safe haven. The market will plateau for a short period, but it is undervalued in most regions and not expected to endure a typical downward adjustment.
I would recommend using cash reserves/equity in Australia to finance any shortfall – difference between cost of purchase and bank loan. Then finance the properties via a New Zealand bank, or other lender if a more competitive rate is negotiated.
Interest rate adjustments, currency exchange and so forth will then not adversely effect the transaction over time. If the interest rate/economy in New Zealand gets to a point where you can save money refinancing the deal from Australia, then look at originating the loan in Australia.
Either way, use equity from the properties – combined with a New Zealand-based loan, to finance ongoing investments in New Zealand.
I am based in the United States and my company has closely monitored the New Zealand and Australian markets over the past couple of years – hence my reference to research.
Although we are involved in real estate investment/development, we do not participate in SFH’s – but do still monitor this segment due to the impact it has across the board.
Best of luck.
— Michael
As you may know, New Zealand real estate prices have appreciated across the board in the past couple of years.
The best location depends on your entry point – as in how much capital you want to invest.
If you are seeking to buy a low to moderate cost SFH [single family home] – positive or negative geared, Dunedin in the South Island is a solid location with a lot of potential moving forward.
If your entry point [capital/risk] is higher, I would recommend the Central Otago region – specifically Queenstown, Arrowtown, Wanaka, or Glenorchy which is significantly undervalued.
These are the hottest markets in New Zealand – internationally at this time from our perspective. Although at the higher end of the price scale for New Zealand, we estimate this region is ~50% of where it should be in terms of short to medium term valuation.
Personally, I would avoid most – if not all, of the North Island including Auckland.
As for first steps, locate a property you feel is appropriate and within your price range – at the same time find a qualified advisor/broker to assist you with the technicalities.
— Michael
“the difference in repayments between a commercial loan and residential loan are quite significant and may tie the persons finances up too much, particularly if on a low income.”
The premise of my post is to bring on board experienced advisors – preferably with a successful track record in real estate investment.
The size of the project is relatively inconsequential – the project in question would be a good platform for implementing this “strategy”.
The experience will bring forth the capital.
One of the first lessons a qualified real estate investor will advise is finance the project with “other people’s money” – private and institutional. Before getting to this phase, considerable time will go into the deal – which is a cost in itself and should be positioned this way.
If the numbers stack up and the deal is viable – and there are people behind the “front man” with a successful track record, the deal will come together with persistence.
As a result, the difference between a commercial and personal loan is a moot point. The same can be said for the individuals income.
— Michael
P.S. Tracey’s enthusiasm highlights the reason why this individual should follow through with the deal – or at least make a few dollars handing it to someone else.
You asked an interesting question which I wanted to revert back too.
“Question is is it better crawl before I learn to walk ? or is it ok to run if you see something that would work?”
Most people will tell you it is better to crawl before you walk – however, many I have come across who abide by this sentiment are not what you would call the most successful people from a financial perspective.
In response to your question, the key is experience – knowing what to look for and how to follow it through successfully.
But if you have the “x factor” experience does not have to be something you possess. Instead you surround yourself with knowledge and experience, people who have been there, done that – succeeded and failed. Experience will follow.
The “x factor” is defined as the ability to identify a viable deal and make it happen – age and your financial situation, i.e. access to deposit, are not necessarily important, within reason, if you have people behind you with the experience to point you in the right direction.
If you have the “x factor”, 9 times out of 10 successful decisions will be made on “gut instinct” – or as you defined it “run if you see something that would work”.
The objective is making sure you cover your bases, in terms of evaluating the risk and having a solid exit strategy/contingency plan in place before the deal “closes”. Not necessarily before you approach the seller/vendor – try and secure a risk free contract [option] as early as possible if you feel the deal is a winner.
A word of advise – ignore what the bank told you and move on to the next lender – if you have confidence in the deal. What you have outlined would appear to be a very good investment. Age is not important, I can back this up with my own past experience. Persistence is everything.
Commercial loan or personal loan, it is all the same money.
But, never walk into a bank with an idea in mind. Be as professional as you can be. Have the idea in writing and backed up with a couple of respected people’s resumes – target the best people you can find, don’t be afraid to knock on their door – you will probably be surprised.
— Michael
Any prominant real estate investor will tell you land or any other real estate holding is defined as an “asset” – not a liability, even if the debt to income ratio is weighted toward debt.
Forget how the Rich Dad book defines assets and liabilities – such statements do not do much for ones credibility as an investor.
The following statement sums up the true definition of assets and liabilities in a round about way.
“..land with no income is an Asset (Land) with an associated Liability (rates). This still has potential for growth (CG +ve), but not a very efficient method of making money.”
This statement is the most contradictory.
“The other method that most of us are on agreement is the most practical way to look at assets and liabilities for long term wealth.”
Based on the majority of comments, it would appear most people on this post understand how to generate “income” from real estate – which is admirable, but not long term “wealth”.
I find the following [back handed] statement interesting – which seems to follow the general tone on this topic.
“But if you are happy your way so be it, dont let me change it in yr quest to accumulate unlimited -ve geared assets”
This depicts the Rich Dad mentality – FYI the authors generate their wealth through the sale of books and seminars, not real estate.
A good number of very prominant real estate investors I know have never acquired a positive geared property – on a different scale to SFH’s, but the fundamentals are the same. These people are a true definition of “wealth”.
Risk = Reward.
An investor seeking wealth should never be consumed by an ongoing search for positive geared properties. This is a sure way to overlook some of the most lucrative investment opportunities.
— Michael
As a general rule – and based on the information you have provided, retain the land and borrow against the equity.
This recommendation assumes the land is not a financial burden and is in a suitable location from a lenders perspective.
— Michael
“I’m assuming the original contract was unconditional, so no matter what the funds will have to be ready at settlement anyway.”
My point was, it would “appear” [Stevie24] is not in a financial position to risk having access to another buyers deposit prior to settlement – or why the need to “free up” the deposit.
As noted, the scenario I outlined is worst case, but I have seen less experienced investors put in this position many times.
The fact that an agreement is “unconditional” means little if the buyer [person the land is on-sold too] cannot meet his/her financial obligations at settlement.
“I dont know what you mean about proper disclosing to the end purchaser”
When someone is in a position where they cannot meet their financial obligations at settlement, they will look at every angle to dispute the contract.
It is never advisable to put so much faith in a written agreement, unless there is a contingency plan to counteract all possible scenarios.
— Michael
