He now has a multi million dollar 30+ property portfolio. Which consists of properties in areas of Auckland which some would have laughed at ten years ago. The same properties now give him an income which has replaced his salary from his full time job and allows him to spend his time as he wishes. This is great for a man who is still in his early 40s.

From what we know of Kesh he has achieved this by adopting a win win strategy. We are proud of having him as a client and today he shares with us some tips for buying.

• Know your investing area intrinsically. Have a close look at which are the good streets and the placement of railway tracks, public transport, shopping. Also check out future development plans in the area, private and in terms of infrastructure. This can change property values for whole suburbs over time.
• Fall in love with the deal and not the house when buying an investment. Try and look at the potential numbers after a tidy up or renovations as well, this can be where you can add value and apart from getting happier tenants, the higher rents can make economic sense.
• Leverage your power team. Keep a good mentor, lawyer, mortgage broker, real estate agent and building inspector close by, this can save you from getting stuck with a lemon
• Understand return on investment calculations, look at the numbers and decide what you are comfortable with, sometimes you will find that over the medium term; a better capital gain can be had with a lower rental return. Some areas and types of properties will lean further towards a capital gain return and further from a rental return.

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Q: Can I buy something with good cash flow and good potential for increase in value?
A: I don’t think so

When you are looking for a rental property you will find that there are two particular types, the ones which provide a good cash flow and the ones with a really strong potential for growth in value over time.

The main reason for this is; in areas where you have the strongest capital gain you have emotional buying. By this I mean more desirable suburbs have parents and couples looking for something they can build their dream life around. So what tends to happen is that a bunch of these emotional buyers will get together in a room and push the price up. This is also called an Auction.

In an area which is full of renters and sometimes are less desirable places to live, you will have investor buyers who look at pure numbers, usually how much will this cost me and how much will this rent for. There are some suburbs which have a bit of both of these types as well.
In saying this there are suburbs which can change from one type to another but I have never taken a course in fortune telling so will leave this for you experts to ponder.

Why renovate then rent?

This might be easier to understand if we use a real live example: Names and details have been changed.

Paul and Peter bought a house in a very average suburb, they decide to buy a do up. Because of the condition of the property and lack of emotional home buyers, Paul and Peter have a lot less competition in price. Buying for $320,000 with a 5% deposit($16k) they have to pay $321 per week interest only or $396 per week over 30 years at 5.50%. Rates and insurance is approx another $50 per week. Rent in this area for property in this state is $350 per week. Realistically the couple will be paying approx $100 per week from their own pockets or approx $50,000 over ten years.

If housing inflation is 5% on average then this property could be worth $500,000 after ten years. If Peter and Paul pay principle and interest, their mortgage will also be substantially lower after this time.

Surprisingly in this suburb if Peter and Paul spent $15,000 in renovations, rent returns can increase to $420 per week, that is another $70 per week. The opportunity cost of not using that extra $15,000 to lower the interest payment on their mortgage by increasing the initial deposit is approx $15 per week. So effectively they gain $70 per week in rent by losing $15 per week in interest. Plus a renovation of $15k will bring the value of their property up by $25k usually if spent in the right places.

Apart from the positive impact of having a nicer living environment for the tenant, renovations can also bring down vacancy rates of your rental and mean a better quality tenant.

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It would appear that by forcing banks to hold an extra 12 per cent of capital for backing mortgage lending from 30 September 2013, the RBNZ is trying to curb high loan to value ratio (LVR) mortgages above 80 per cent.

It is difficult to gauge how the banks will react to the RBNZ’s move, but they might move to restrict borrowings above 80 per cent, or by increasing the cost of borrowing through higher interest rates or higher insurance premiums (low equity fees).

However, Banks already insure over 80 per cent borrowing by charging a low equity fee or higher margins on interest rates.

Being here on the ground in Auckland, it appears that the escalating house prices are due partially to overseas cash buyers and any bank reaction to the move by the RBNZ, will not affect them at all.

Effectively it just makes it harder for the average Kiwi to get into a home. The RBNZ’s move will affect first time home buyers or lower income earners if they have limited deposits, unless they have family who can assist with gifting funds or providing additional property security.

Of course there are other options for people with higher incomes, including borrowing against the shortfall of deposit from elsewhere.

At the end of the day, those with limited deposit, average incomes and no family to assist will be shutout of home ownership.

Clearly the RBNZ thinks it can curb the demand for housing. I am not sure that the suggested methods will do this, but will certainly open the market further to cash buyers.

It may reduce the competitive demand for houses and ultimately the soaring prices, but that then exposes the banks to the risk of the existing highly leveraged properties from a market with falling prices.

Perhaps the only real way to curb the soaring prices is to limit property ownership to those with New Zealand residency.

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Mortgage protection insurance differs from a lot of critical illness type covers, in that it is much more comprehensive and does not limit your cover to a specific list of conditions. As a registered financial advisor I think about the following when trying to make premiums for mortgage protection insurance affordable for a family.

Payment Term

“Payment term” is the length of time the insurance company will continue to make monthly payments to your family while you are suffering from an illness and unable to work.

Dropping this payment term lowers the insurance premiums. This is only really ideal if you think you will be able to make other arrangements to cope with long term disability. Lower payment terms can be used alongside “total permanent disability” to lower some risk. “Total permanent disability” cover is a type of insurance which will pay out a lump sum in the event that you are unable to ever work again. I tend to quote premiums with the payment term set at retirement age(65).

Wait period

If you fall ill and are unable to work; the “wait period” is the amount of time you would have to wait before getting your first payment from the insurance company. Increasing the wait period to thirteen weeks can reduce your premiums drastically.

This can be a good way to reduce costs if you can manage your own financial commitments at the onset of loosing an income due to illness. Holidays and sick leave from an employer can help to tie you over while waiting for the initial payment as well any savings. Note – if you have this type of cover make sure you check if your claims will be paid upfront or in arrears, this can mean a difference of one month with some covers.

Cover amount

You don’t have to cover the full amount of your mortgage if you feel that there will be other family income which will continue in the event of you not being able to work due to illness. Extended families sharing expenses and or couples could consider this as well as those with other investments which generate an income. Also remember that when taking a mortgage repayment insurance, ACC is not offset. Meaning that you are able to claim mortgage protection insurance if you are receiving ACC payments due to an accident.

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Read the full article here: Are You Sitting On The Fence?

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Read the full article here: Investment Property Protection for Landlords

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The One Bank Trap is a free e-Book providing valuable commentary on how New Zealand property investors can avoid the one bank trap by structuring their mortgages effectively. The commentary is ideal for property investors growing their portfolios and dealing with the associated challenges of dealing with multiple lenders.

How to structure your loans and protect your assets as you grow your property portfolio is the underlying message in this free eBook. The good news is easy to follow diagrams are included and Kris will welcome your enquiry to discuss your personal situation.

Here is an extract in an article on this ebook

“New Zealand Property Investors understand the need for asset protection and to have structuring in place that protects those assets and allows equity to build. But many of these investors fall into the trap of using just one bank for their lending.

So why is this something to avoid? As a property portfolio grows and investors take on more and more debt, lenders become more difficult to deal with and may impose limits to borrowing, or place too many terms and conditions on lending.”

Source
You can get your copy of the One Bank Trap >>here<<

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Read the full article here:

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Looking the other way and feigning ignorance does not cut it! Just because you choose not to see or look, does not mean it is ‘hidden’
When people fail to join up the dots, the consequences for the people involved can be serious.

Find out more at our latest blog

Good luck out there!

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