Real estate investment - Interest only vs capital repayment

[ubercat]

Rentals are low 13 to 1400 a month. Australia also charges a government stamp duty. So apart from the other buying costs you donate 20000 to the government.

I'd be interested in your thoughts on property managers. I'm thinking about buying the properties in regional New Zealand and getting a property manager since I live in Australia. New Zealand doesn't have that crazy government tax so my thinking is that even with the property management costs I might be better off. And if I buy in the regional area of my state it would be quite a hassle doing it myself.

300k is regional price. Median price in Melbourne or Auckland is 700k.

 

[BeExcellent]

@ubercat the short answer I would give is pick your property manager before you buy anything.

There are many ways to steal or fudge numbers in real estate. Property managers are in a position to steal from you in a variety of ways and none will manage your property as tightly as you would. You must understand that & manage the risk accordingly.

That is why if you do not already have investing experience I'd strongly advise you to buy local & manage yourself for a while. The value is in what you will learn about property management by doing. It makes it harder for people to rip you off in the future if you know yourself how things should be run. The importance of this cannot, IMO be overstated.

 

[ubercat]

Problem is after paying AUS Govt over half a million in taxes in the last 15 years and on current earnings that will be over a mill by the time I retire, I d like my pension. If you have assets over 250 k apart from your house they take away your pension. And that's NOT net assets. Best plan under the current Rules is keep a mortgage on your house and when you can collect your 501 k or our equivalent pay off the mortgage with that and get a pension. So I have to invest overseas

 

[BeExcellent]

Man that is God awful. I can advise on how to handle property managers (I've used them for years) and give you some basics.

What is your expected investment plan?

 

[ubercat]

I was planning to target units in farming support towns in growing regional areas that also have tourism. Ideally there would be a regional hospital nearby as that's a good stable source of jobs. NZ has LVR rules so I may have to go in with 20% deposit. That's why I'm targeting units to keep the spend down as I want to buy another unit in a different regional area to spread my risk. Standard 30 year mortgage. I like your idea of renting to retirees so I'll have to do research on what appeals to them in that market.

 

[BeExcellent]

The other thing to be aware of is volume efficiency. Can you pick up a duplex or perhaps even two in your target region in NZ for the 70k you have to invest?

You'd need to buy each duplex for about 150K in that scenario to meet 20% LVR. You'd have a little left over for purchase costs & repairs in that case.

If you were able to initially invest with more than 1 unit, you are more important to your property manager's bottom line.

Managing 1 unit is almost as much work for the manager as managing 5 units. But 5 units make the property manager more money. Which owner do you think is more important to the manager? The 5 unit owner. Without exception.

In my markets I own the most units in one manager's stable of units, and I think the second most in the other. Is keeping me happy integral to the property managers' bottom line? You bet your ass it is. And STILL neither one manages as tight as I would. It's still not their money invested so they don't respect it quite like I do.

I don't know real estate law in NZ. Can you have the same real estate agent serve as your buy/sell agent AND your leasing agent? I use the same agent/broker for buying/selling/leasing in my markets. I find the potential income from me either buying additional units or selling a property off gives them additional motivation to do a good job for me.

You want to tie their financial best interest to yours while at the same time de-incentivizing predatory practices that benefit them but hurt you.

Interview agents and managers as you prepare to purchase. Ideally find someone you can build a complete relationship with (buy/sell/lease) and go meet them. See how they run things. You want someone additionally who is transparent and who you can work in tandem with. You do not want someone who is unwilling for you to be involved in management. The "we handle everything; just leave it all to us" shops will bilk you.

 

[BeTheChange]

@BeExcellent

Agree with most of what you say except i disagree on comps as the go to means of valuation. I think comps are reflective of the market of the time and just like the market price of stocks can be driven by a number of factors that dont reflect fundamental value. Just look at the difference in real estate pricing in 2009 vs 2006!

I dont believe there is such a thing as a good property or a bad property. Only underpriced or overpriced based on the value that I or the seller can extract from it.

Another reason why I believe comps are a poor metric is due to the illiquidity inherent in the market and the fact that houses are not fungible. This means that to an extent, we the owners determine the sales price. I have a number for what my properties are worth based on their cash flow value to me and I will not sell for anything below this. As such i made a gain on bargain purchase on all my real estate investments.

Furthermore, unlike other financial instruments, housing is not always purchased for investment purposes.

Comps should be used more as sense check or benchmarking tool rather than as a primary method of obtaining a purchase / sales price.

 

[ubercat]

Thanks tremendously @BeExcellent that all makes sense. Can you explain a bit on how you work with the agent.

 

[BeExcellent]

@BeExcellent

Agree with most of what you say except i disagree on comps as the go to means of valuation. I think comps are reflective of the market of the time and just like the market price of stocks can be driven by a number of factors that dont reflect fundamental value. Just look at the difference in real estate pricing in 2009 vs 2006!

I dont believe there is such a thing as a good property or a bad property. Only underpriced or overpriced based on the value that I or the seller can extract from it.

Another reason why I believe comps are a poor metric is due to the illiquidity inherent in the market and the fact that houses are not fungible. This means that to an extent, we the owners determine the sales price. I have a number for what my properties are worth based on their cash flow value to me and I will not sell for anything below this. As such i made a gain on bargain purchase on all my real estate investments.

Furthermore, unlike other financial instruments, housing is not always purchased for investment purposes.

Comps should be used more as sense check or benchmarking tool rather than as a primary method of obtaining a purchase / sales price.

I agree with your analysis @BeTheChange but experience has taught me to respect comps as the best indicator of current value. Not for the purpose of valuation per se but for the purpose of actual value.

It's similar to the stock market in a way. As you know values flow up or down, fluctuating according to market sentiment & direction. Unless realized you have nothing other than your actual investment basis. Just like with stocks where you have gains and losses on paper only unless you sell. Upon sale in either paper assets or real estate you realize gain or loss at a particular moment in time.

I agree 100% with your second paragraph, however if a decision is made to sell and realize capital from sale, comps are, I find, the best benchmark. Comps indicate the current market sentiment should you need or desire to liquidate for some reason. Comps also give indirect guidance insofar as what you can expect in the market considering the unique features of a particular property.

I know for example I can ask about 15% above comps if I have installed stone counter tops in a market segment where they are considered a luxury. The counters didn't cost me 15% of the value so it is a feature that covers it's cost and adds a bit in addition. People who don't have $3500 in free cash (to install them) can finance a house that has them, so they are able to get a desirable feature they can't afford out of pocket by paying more for the property. They CAN afford a slightly higher house payment. Obviously they end up overpaying for that particular feature over time but they will because it has "Wow" factor & prestige & people like to show off where they can. People buy on emotion.

Now. It should be apparent that the above rationale applies more to single family homes than to commercial property. But make no mistake, people by or don't buy based largely on emotion unless they are quite seasoned.

Single family homes, which make up 60% of my units, are the most liquid. You can sell them to homeowners. Time must also be considered and here again the comps have use. Using comps combined with days on market a pretty accurate determination can be made about present actual value. I've had need to sell rapidly before. When you need to sell it is advisable to know how to sell fast.

In order to get a fast sale you must price well from day one and not be too greedy. Most people mess this up. Holding costs and risks while a property sits on the market are high. I prefer to reduce those risks and price for a quick sale as a regular strategy. Do I leave a bit of money on the table? Yup. But recall that I buy well under market value. I can afford to not be greedy. I already baked in upside. This is why the old adage "You make your money when you buy."

I sell (as in closed & sold) in under 45 days and move on. That means the property goes under contract during the first few days to 1 week on the market. I create high interest & urgency in the market. I get higher prices in the end by pricing well at the outset rather than having a listing go stale & require months on the market combined with price reductions, both of which create negative perception among buyers.

Now. For valuation and showing the income producing ability of a property I look most closely at cap rate using the market extraction method, which also relies on comps. The problem is that market values do not always track value calculations in small markets. So what someone is actually willing to pay might be less than what value calculations might suggest. That likely is NOT the case in your market, which is why the two cardinal rules of real estate are:

1. Location, location, location
2. All markets are local

 

[BeExcellent]

Whatever you do, be wary of becoming over leveraged. Using too liberal a method to calculate values (all value calculations have subjective variables) can make your financial position appear stronger than it actually is.

This is great in that it allows you greater borrowing ability and it enhances net worth. It is dangerous in that should the market turn and race downward you can end up upside down on property. If that happens you are in a perilous position, you are suddenly leveraged to the hilt and you better have income or cash reserves to carry the properties if you run into high vacancy and or unexpected required capital repairs.

Look at the recent 2008 downturn in the US as an example. Look at Las Vegas. Very smart people lost their asses there, including a close friend of mine (one of the smartest people I know), who ended up in foreclosure. Somehow he avoided bankruptcy.

In the early 1980s a similar downturn occurred in Houston and elsewhere in US as interest rates spiked over 20%. Lots of smart but over leveraged people went broke. A serious downturn occurred in New York City following the 9/11 attacks. The entire problem is that real estate is in fact illiquid. The market can turn against you faster than you can unload property at times.

The other problem is that usually people do not realize they are over leveraged until it is too late.

There are instances where a highly leveraged position actually gives you more clout. In such instances the lender's welfare hinges on the property owner's welfare. I have this sort of influence over a tiny bank I work with. It is an uneasy but necessary relationship. I know a corporate executive who is president of an oil related business that is extremely capital intensive. He and his company use high leverage to advantage in certain business cycles, exercising influence with lenders.

But most individual investors are not that sophisticated nor that influential so the lenders could care less about you under financial duress.

Wield leverage with care.

 

[BeExcellent]

Thanks tremendously @BeExcellent that all makes sense. Can you explain a bit on how you work with the agent.

What I do once I've identified a potential market I might like to operate in is look for agents with very specific characteristics:

1. They need to be property owners themselves
2. They need to be able to rep me to buy, sell, or lease
3. They need to accept that there is going to be ongoing active management from me and they need to see me as part of the management team concerning my properties.

In short I want more involvement or control over my investments than some managers are comfortable with. So a requirement for me is a meeting of the minds, an understanding of what my expectations are. I won't sign away my rights either. I understand contracts and contract law (I'm a decent backyard lawyer - thanks pops!!) and I read legal agreements carefully. If the management contract is too opaque for my taste, its a no go.

My managers will tell you that I am firm, but fair & they enjoy working with me.

All of this is predicated on the fact that I started off in real estate investing running and managing everything myself. I wrote my own leases even. I've been to court (and won). I know what normal expenses look like & what looks odd. It becomes rather obvious to anyone who chats with me about what I do that I KNOW what I'm doing. Do I know it all? Of course not.

But I usually can identify my limitations, which keeps me out of trouble more often than not and my knowledge confers a confidence and acumen that commands respect from people in relatively short order. This assumption of competence I think, serves as a deterrent for unethical practices since I know what trends to look for that indicate whether or not things are as they seem...and even then one must remain cognizant of others' greed potential at all times.

This is why I so strongly advise getting your feet wet on your own before using a property manager. To hire a property manager without your own management experience really puts you in a position of blindly having to trust him or her. To me that creates a great disadvantage in a number of ways:

1. You are ignorant & therefore may be taken advantage of
2. You are ignorant and therefore may question or raise hell about something done for your best interest that in your ignorance you don't understand is in your best interest
3. You don't have knowledge to discern between 1. and 2., which can create any number of problems.

I've seen one of my property managers quit on owners who repeatedly exhibited trait 2. He tries to explain rationale...they just don't "get" it. He'll tear up the contract in extreme cases & quit. Not good. Suddenly having an asset without management far away or over seas is not good. It's potentially disastrous.

I stand by my recommendation to find a way to learn locally. Can you get a mobile home (trailer home) cheap? Those have low acquisition costs and will give you tremendous experience on the management side.

I do not mean to come off like a snot. You are obviously smart & have been giving this quite a bit of thought. I just think that going into this type endeavor overseas and requiring obligatory management in something with which you are unfamiliar on a very basic level has the potential for a really poor outcome you may not be able to foresee.

Having watched up close my father lose hundreds of thousands of dollars to South American businessmen on something he was not knowledgable about in another country I've seen it happen first hand. It's nasty.

Be very careful. It's not something I'd advise but only you know your abilities and situation.

 

[ubercat]

Thanks the trailer home is a good idea if I can do it on borrowed money. Totally agree there s books on being a landlord and no substitute for experience. And always plenty of sharks. I ll PM @Bible_Belt he seems to be knowledgeable in that game.

 

[RichardTheFrog]

Thanks the trailer home is a good idea if I can do it on borrowed money. Totally agree there s books on being a landlord and no substitute for experience. And always plenty of sharks. I ll PM @Bible_Belt he seems to be knowledgeable in that game.

Don't be a landlord. Flip houses instead. This isn't a real estate forum and this is the last word I will say on the subject, but you make more that way.

If you buy a "standard" single-family home with a mortgage to rent out, you will be making a few hundred dollars per month. That's it.

If you want to learn about real estate, go to BiggerPockets.com. I have spent so much time on that forum that I have gotten all the information I can out of it.

I am a property manager for a living. I don't want to hear @BeExcellent 's nonsense female-brain response.

Even large firms that own and rent billions of dollars worth of assets make the majority of their money buy improving and then reselling properties.

You can make a lot more money by flipping houses IF YOU KNOW WHAT YOU'RE DOING than you can by renting properties.

And that is the last word I will say on the subject.

 

[ubercat]

And how would I flip a house in a different country?

 

[BeTheChange]

Don't be a landlord. Flip houses instead. This isn't a real estate forum and this is the last word I will say on the subject, but you make more that way.

If you buy a "standard" single-family home with a mortgage to rent out, you will be making a few hundred dollars per month. That's it.

If you want to learn about real estate, go to BiggerPockets.com. I have spent so much time on that forum that I have gotten all the information I can out of it.

I am a property manager for a living. I don't want to hear @BeExcellent 's nonsense female-brain response.

Even large firms that own and rent billions of dollars worth of assets make the majority of their money buy improving and then reselling properties.

You can make a lot more money by flipping houses IF YOU KNOW WHAT YOU'RE DOING than you can by renting properties.

And that is the last word I will say on the subject.

Or you can just do best of both worlds. Buy a property with substantial renovation potential, fix it up. Revaluae and refinance by pulling out the additional equity (which effectively gives you the same result as a sale without incurring the text ability) and plow the additional cash into the next property.

This strategy works best in areas with high rental potential.

 

[Bible_Belt]

Thanks the trailer home is a good idea if I can do it on borrowed money. I ll PM @Bible_Belt he seems to be knowledgeable in that game.

Everyone has their niche. I just know a lot about trailers, especially older ones. The older something is, especially with an outdated and obsolete design, the fewer people there are who understand it and how to work on it. You could do that with houses if you just got good at one particular type of repair that was too difficult and expensive for most people to accomplish, like old boiler systems and also foundation work on old houses. You can buy a house for a big discount if it needs a big repair.