Book Club – Property 101

Property 101: A Guide to Investing in New Zealand with a Focus on Auckland. By Mathew Gilligan
TRANSCRIPTION

Let’s have a quick look at what my favorite property investment book in New Zealand is. It’s Property 101. It’s written by one of the owners of GRA, Matthew Gilligan. Their firm’s got over 5,000 clients, mostly property investors. So this book is pretty much the bible when it comes to investing in property in New Zealand and I want to take you through a few quick points that I think are important but I really do recommend that if you are investing in property, whether you’ve all ready got 10 properties or you’re just thinking about your first, I think it’s 40 bucks, you can buy the book online on their website.

But the book dives, you know, quite comprehensively into a lot of topics and say, you know, firstly, why property? So, property versus shares. There’s a little bit of debate what is going to make you the most money and generally speaking, you might want to consider diversification. But property brings what shares can’t and that’s leverage. You can use leverage when you’re buying shares but it’s not advised but leverage means that you can, you know, put $100 grand down and buy a $500k house and then, you’re getting capital gains on the $500k.

Rather than with shares, you put $100 grand down, you’re only getting growth on that $100 grand, not the $500 grand. So some of the topics that I think are important are about property cycles. So understanding that there are property cycles in New Zealand and each of the different regions have their own property cycle and generally speaking, Auckland leads that cycle and that Matthew in particular is very keen on buying when others don’t want to and waiting when the market’s really hot, especially to find better deals.

So, be careful when you invest is the main premise there and there’s a really good chart on the different stages and things to look for that are going to help you identify what stage the property investment cycle is in. For example, in a downturn, there’ll be an oversupply of stock, rents are stagnating, there’s, you know, slow prices at the moment, not much confidence and then just before there’s a bust in the market, valuations fall and there’s abundance of trades people.

So just identifying certain traits of where you are in the property cycle will help you with your property investment decisions. Matthew talks a bit about different suburbs and what to look for when you’re going for capital gains. So opportunities for property investors in Auckland, land banking, larger family homes, subdivision, cash flow, you know, people in Auckland tend to say there’s not a really ready market for cash flow in Auckland and Matt disagrees.

You’ve got to create cash flow through creative property investment and identifying those good opportunities. Coastal lands, central suburbs, there’s quite comprehensive information about the opportunities and on the Auckland Unitary Plan as well. Small towns, the cash flow myth.

So one of the important concepts from the book is that investing in the regions, based on Matthew’s opinion, can be quite a bit more dangerous than investing in the main centers. So he really does prefer investments in Auckland rather than buying, you know, cheaper properties in the regions.

And that’s because the myth that there’s cash flow…people buy in the regions for cash flow but if you step back and take a look at, you know, the 10-year cash in and cash out of property investments in those regions, you really got to be aware of the deferred maintenance risks over capitalizing in that area and then, basically, there’s a catch-up event for thesmall centers relative to Auckland and, you know, there’s a bit of a big boom madness driven by inexperienced investors, loose credit, and greed and that’s kind of a cycle that repeats.

In most cases, I’m just reading from the book here, the small town fundamentals were and still are low incomes, low rents, high deferred maintenance costs, high council rates, balance to an oversupply of housing and low demand because of population growth is relatively small. So those are, you know, diametrically opposed to what you get when you invest in Auckland.

So, you know, without diving too much into the detail, we generally agree with Matt that buying in Auckland is much better than buying in, you know, small towns. Especially, you know, if you’re buying for cash flow, really, what you’re doing is delaying the pain because if you’ve got to repair the roof on a $150,000 property, still probably going to set you back $20, $30 grand and, you know, that same $20, $30 grand will repair the roof on a million dollar property.

So you’ve got to think about that sort of thing as well. Matt talks about wealth planning and property investment. Goal setting is an important part of building your property portfolio. So, financial plans, strategy plan, modeling for the future, and making sure that you’re not working with someone that has actually no idea about property investment and it’s not just spreadsheet, filling things in because that can be quite a dangerous way to do it, working with somebody that’s never worked with property because they don’t understand what really can go wrong and, you know, Murphy’s law suggests that things do go wrong.

The book is littered with case studies. There’s one, my favorite one is when a group of six people working with a property coach who duped them into buying a plaster home that was leasehold. So Matt really does just say, “Hey, look, make sure you’re working with experts that are not shysters.”

And especially leasehold properties, unless you know what you’re doing, stay away from them. Matt talked quite a bit about trading. You buy for a discount, sell at market value, buy at net value, you know, buy in a rising market, hold on for a little bit and then, you know, try and push [inaudible] till much longer down the track and then, you’re getting capital gains on somebody else’s dime.

But the trader versus buy and hold analysis actually does suggest that a lot of people will make more money doing buy and hold investing, rather than property trading. This is because you’re avoiding tax and avoiding paying agent’s fees amongst other things.

So there’s some good analysis here on trading versus buy and hold. Especially if you’re new to investing and you’re not an experienced trader and you’re thinking about trading, it’s worth considering, you know, the ramifications of getting into trading because you might taint your portfolio and if you get bad advice, it can end up costing you a lot more.

Matt is a big proponent, like a bunch of other property investors, of creating instant equity on acquisition. So what does that mean? Is buying at a discount. Matt talks about the 13 Ds of property investing. I will quickly run through some of them. So, the 13 Ds is buying a do-up. That’s his favorite strategy, that’s renovations.

Deceased estates, buying off dumb people that don’t understand the value, buying [inaudible] properties, do-it-yourself sellers, so people that are selling privately often don’t understand the value. Divorcing people. You know, being in the mortgage game, we see a lot of people that are divorcing and they do sell their house under value. They just want to get it done. So if you can be on the other end of that transaction, it’s a good way to make money.

Buy from developers who may be unexperienced or being forced into selling. Deadlines, people who need to be somewhere. I see a lot of this as well. People are moving to Aussie, they need to sell. Everybody else is trying to sell, they sell at a discount. Dodgy builds. Now, you should only do that if you know what you’re doing.

Desperation, disillusionment, and delayed settlement. So deal finders, you might want to look up iFindProperty or other property buying companies. They will be able to help you out and they often bring good deals, and development potential.

So buying a property that maybe the owner doesn’t understand the real development potential behind it when they’re selling it. potentially, under value. So, in conjunction with those 13 Ds of property investment, another strategy is to become a suburb expert. Now, what you might do is decide that you understand your area as good, if not better than any other property investor.

And this is a tactic used by Graeme Fowler. He understands the areas that he is a specialist in and he tries to stay as investing in those areas and as a result, he’s a buyer of choice for a lot of people that need to sell quickly or, you know, off-market deals or even deals that have gone to market, property, real estate agents will call Graeme up.

Especially if those properties are in his area, knowing that if the deal is right, that they’re going to get a quick sale. The financial analysis of suburbs is a really key aspect of this. So Matt goes through in detail comparing Westmere, Mount Wellington, Manurewa, looking at the long term yields and returns from suburbs, you know, comparing A suburbs, B suburbs, and C suburbs for, you know, capital growth and cash flow and, you know, the total analysis of it.

And you’ll be interested to see the total, you know, return over the long term in some of those suburbs, 11%, 10%, 12%, you know, comparing, you can do your own numbers, copy the graphs if you’re not working with a property accountant or you just want to do analysis by yourself, the charts and numbers are very helpful guideline and, you know, comparing Manurewa, for example, an Auckland suburb, with South Taranaki, you can compare the total return.

You would think, “Hey, buying cash flow properties out of Auckland, that’s where I can afford.” And you’ll see the long term total return is actually much better buying in Auckland and even if it is negatively geared and you just…the key thing is to be able to afford the negative gearing. Making an offer and negotiation tips. I found this to be incredibly helpful.

Increasing equity through adding value. So Matt talks a lot about renovation and this really, for most property investors, should be probably one of the key ways that you’re making money. Buying property that needs work done on it, not spending too much on the renovation. Maybe you buy a $500k house, spend $30k, get it revalued a couple of months later and it’s worth $600k.

So you’ve created that equity that way. Buying and selling property. Make sure you document your intentions and talk with your property accountant about what you’re up to and understand the different property ownership entities, you know. There’s seven, I think, listed here. Sole trader, general partnership, limited partnership, limited liability company, look-through company, trust, trading trusts, you know, it’s a bunch of different things to take into account.

You want to make sure you’re working with a property accountant that understands what’s the best tax and ownership structures for you. There’s some information about banking and finance, managing debt. Obviously, when you work with a mortgage advisor like at iRefi we are specialists in this. Matt is… he’s been around in the property investing game for a long time.

So one thing that you should listen to him about is how banks react when the market changes. And he’s a big proponent of pushing this message, is that a bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain. So he’s seen banks pull out of deals and people lose everything they’ve got because the numbers don’t work for the bank and they’re mortgaging the property.

So you just got to be aware that there is risk. Property prices don’t always go up and you’ve got to be prepared that you’re not overleveraged and you can weather storms if they do come. And that’s how the rich get richer. They’re buying from property investors that get overleveraged and can’t afford to hold through the down cycle and they’re buying at discounted prices, you know, because they can afford the long term hold.

Building a professional team. Matt is a big proponent of working with specialist lawyers and brokers on the insurance and the mortgage side, specialist property managers and specialist real estate agents because time is money. Working with those experts, even if you have to pay, is money well spent because the cost of not working with people that you trust and that know more about the market side of things that you don’t is that you’ll buy the wrong properties and waste a lot of time.

So, Property 101 is the book that I make pretty much everyone that works at iRefi read. I send the book to lots of clients. I don’t make a clip on it. It’s a $40 book but it’s filled with decades worth of knowledge from somebody that should be charging, you know, a couple of grand an hour for his time.

So, you know, the return on investment on buying and reading this book is probably at least a thousand to one. So once you’ve got the book, it’s the best New Zealand property investors book that I believe that has the most comprehensive information for beginners and even experienced property investors.