Having bought and sold hundreds of properties, it is clear that Graeme knows what he is talking about with property investing. In this book (he has written a few) Graeme treats us to the simplicity and effectiveness of his investing style when he is looking to buy and hold instead of trading or flipping. Not including the trading properties he bought in 2014, Graeme set out determined to buy 10 properties in 3 years that met certain criteria and ended up buying 21* (keeping 20) to put into a new Trust created to hold these ‘buy and hold’ investments.
Summing up the book and buying strategy quickly, you simply must buy below the Registered Valuation (we’ll cover valuations another time). The average discount he bought at was more than $23,000 cheaper then Registered Valuation (which is what he could probably on-sell it for again). For the Auckland investors, it might not seem like much, but when the property is $140,000 instead of $163,000 it’s basically a 14% discount! When you save $23,000 per house, on 20 houses, you get almost $475k in equity accumulated in one year simply by buying well.
Strategy 1 – buy at a discount
How do you do this? Know the area, know the agents, target investors or homeowners that need to sell – urgently, target mortgagee sales, follow up with houses that take ages to sell (because overpriced listings often sell below where they would have sold if the price was fair, to begin with), and get in front of listings before they get listed on the market by talking to tenants and property managers for information on neighbours or friends who are looking to sell (to avoid agents fees and competition from other investors).
Strategy 2 – create equity on a budget and quickly
Graeme would arrange Registered Valuations to be completed the day he would buy the place and not let the valuer know the purchase price. This way, the bank would see all the equity he was getting by buying at a discount and a roadside inspection 3 months later could be completed to allow him if he wanted to, to top up the mortgage to pull out more equity.
Strategy 3 – protect yourself from downside
Graeme likes to use 20yr Principal and Interest loans for his investment properties and track his yields on these numbers. This way, the initial calculations give him some confidence in the deal and this means he builds up equity faster in his portfolio (higher contributions to principal and less interest paid to the bank) which means if the market falls that his LVR position is not too negatively impacted. Many investors (most) use interest-only loans and get caught out when the expected capital gains do not eventuate and rents do not rise as the investor had hoped. Many properties around NZ have not had much gain above inflation in the last 10-20yr (some were worth more in 2007 than in 2014). By using Principal and Interest loans, Graeme continues to build equity in any market (rising or falling) and he cares about cash flow only – not increases in property value (which is welcomed but not counted on).
Graeme warns that banks can call in loans whenever they want and you have to be careful not to let your LVR become an issue. Graeme bought numerous properties for this portfolio where the sale was mortgagee and the bank accepted less than the mortgage amount. Banks will protect themselves so you have to be careful over-leveraging (negatively geared Interest Only loans are ill-advised).
Strategy 4 – Focus on cash flow and minimising expenses.
When buying in Auckland, many investors accept 3-4% yield or less and expect capital gains to protect them. In many cases, investors in Auckland are actually buying negatively geared properties, which is fine, if you understand the risks. Many investors have built up $10million plus of equity using the capital gains approach (100s of our clients do this successfully) but Graeme takes a different approach. He focuses on CASHFLOW! Does the property stand on its own feet and does the rent cover the mortgage without a shadow of a doubt? Most of the properties Graeme bought in the 2014 year for this purpose were 11% or better yield. Some were close to 14% which means Graeme’s rental income will actually help him keep buying.
When you buy a property that has a very low yield (or negative yield), it lowers your borrowing power for more investments. So you get capped by banks for future borrowing and rely on capital gains… you basically have to wait.
Pulling these strategies together.
Because Graeme buys properties that have very good cash flow, and he gets instant equity (buying undervalue), and he does a few quick fixes to the properties to increase rents, this allows him to keep borrowing and buying.
Here is the spreadsheet for his 2014 Buy and Hold investing.
And after two years the capital gains made his buying that much more impressive.
At iRefi.co.nz we call this the 3 Cs.
Capital Improvement (smart renovations)
If you have a good combination of at least 2 of the ‘Cs’, then you’re on your way to financial independence through property investment.
Grab the book and learn for yourself.
Buy the book online from the intelligent investor ($34.95) or Graeme has kindly offered to take orders directly via his email firstname.lastname@example.org ($25 incl postage).