Today you are going to learn 3 of the most important elements of property investing. Always come back to these 3 things when assessing a deal.
First check out this video where my business partner Blandon gives a high-level overview, then read on for more details.
A brief word on Blandon Leung, as he will feature heavily in the property emails. He is my business partner for 6years and has received a ‘Top Adviser Award’ from ‘NZ Adviser’ in 2017, 2018, 2019, 2020, and 2021. I guess he will keep getting voted in the top 10 advisers as he has a lot of good ideas and experience for helping property investors. He is the main man behind the property workshop formula course and owns a bunch of properties himself.
When assessing what property to buy – most people start with what they can buy. Then some people move on to thinking about what they should buy and look at either location, maintenance, or yield first. However, you can combine these elements into your strategy and check 2-3 boxes at the same time.
Before discussing combining the three strategies you must know your starting point and what you can afford to do. So before going any further, take the Mortgage Snapshot. It’s free and takes just 90 seconds, it will calculate your borrowing power, available equity, and more.
One way to think about investing is to invert the problem. Flip it on its head. Think opposites.
A property that loses value over time, has negative cash flows, and cannot or should not be improved or fixed (leasehold apartments for example often fit these criteria).
This is where ALL expenses are covered for the property. There is the money left over each year. After paying the expenses for interest, insurance, rates, maintenance, and other bills, you get money in your pocket. Negative gearing used to be popular when the accounting rules were more favourable, and with easier historic lending guidelines.
The last few years have seen rule changes by the government and policy updates from the banks that make it far better for investors if they buy and own properties that produce a profit. Especially if you want to keep building your portfolio.
Because rates are going up, it is getting harder to find properties that produce positive cash flow when purchased using 100% finance. We’ll dive deeper into this challenge later in the series.
This is the increased value in your investment properties based on the valuation updating in line with market forces. Using historical numbers as a guide, we can predict that over the long term the gains in value for Auckland properties will be better than a smaller town that is less dense like Invercargill.
Go back and look at property values 30 years ago – places now worth $2mn used to be worth $60,000. It is not guaranteed that this sort of trend will continue but it is reasonably expected that values will keep appreciating in nominal terms as well as in dollar amounts.
This is one of the reasons why the exact same property in Auckland is much more expensive than in Invercargill. Capital gains do not require much work from you, it is almost effortless money, but it is not as dependable in the same way as cash flow because of market cycles.
So many accidental millionaires have been created by buying property and just paying off the debt over 20-30years. Even people with low paying jobs and not much acumen for finance have become wealthy owning property. Think ‘location, location, location’ along with the right property.
This is spending time, effort, money, on improving your property.
Think; renovations, landscaping, adding bedrooms, changing layouts, adding other dwellings, fixing things… you can often get gains of $3-5x in value for each $1 you spend on improving the property.
You can spend $10,000 landscaping and $5,000 on home-staging and often dramatically increase the street appeal and interest in a property, even potentially adding $100k in value. I have seen it happen.
For example –
You may paint a few walls and fences, knock out a wall for an open plan kitchen, fix up the garden for a total cost of $20,000 and get a new valuation for the house $60,000 more than before the work. This $40,000 gain is your equity growth and how investors are able to recycle (some of) their deposit out of the property so they can keep buying.
In later emails, we will share some case studies. One particular property that allowed the owner to:
This particular house combined the 3 elements beautifully.
You probably have questions like…
“Is it possible to buy properties that have good cash flow and capital gains and have instant equity?”
“How do I decide what to do next?”
“What if I am really lazy and not handy?”
“Should I buy another property or pay down my mortgage first?”
It depends… You do not always have to give up one element for another.
The best investments include all 3 but most will fall into 1-2 elements (hopefully at least 2). When looking at an investment opportunity you should be able to spot the potential to add or realise the value in the short and long term. Many investors just buy and hope… and we know hope is not a strategy.
In the following emails, you will learn to understand the obvious and nuanced difference between gross and net yields, how to assess capital gain potential, and how to factor in improvement options through renovations and creative presentation.
You will start to realise that most properties are not great investments because they carry negative factors or are priced too high. If there is not much upside then buying the property does not make financial sense.
Working with a mortgage adviser will help you confidently assess and discuss investment options. You can ‘talk shop’ about the difference between buying a new build in a nicer location with fewer maintenance worries (but unlikely to provide much yield or have the option to make improvements), versus the option to buy a real ‘do-up’ that may mean you need to get your hands dirty a little but should provide more immediate equity growth and in the short term more cash flow.
The mortgage adviser’s insights and help are usually free and come with the benefit of them working personally with hundreds of other property investors.
You will probably instinctively know if you are prepared to manage or complete renovations yourself, or if you do not have time or the desire and prefer a simple solution. Renovations just after purchase are probably the quickest and easiest way to build equity fast (unless you get an insanely good entry price). There are even service providers who can manage the whole renovation process for you and you can factor in these costs upfront and borrow the money through your existing equity. Let the numbers guide you.
I repeat – let the numbers guide you. Try not to be swayed emotionally into buying a property that you ‘like’.
The common objection to getting into property investment is that it is hard to understand and risky. My feedback is that all jobs and projects have complexity… Being a pilot, a cop, a teacher, I bet your job right now has some difficult aspects. You simply have not learned what you need to know yet to feel confident in doing what needs to be done to build up your wealth.
If not property… then what? How will you build your wealth?
Our goal is to show you it’s not too hard, complicated, or risky, as long as you have good guides along the way. These lessons and videos helped us simplify the strategies and save a lot of time repeating ourselves which means we have been able to help even more people.
How do we know what we are talking about? Our team has helped 5,000+ Kiwi homeowners review their options with regards to property investing and purchasing in the last 5 years.
We are happy to share a lot of the secrets and lessons learned from experienced investors to help those who want help and are willing to put in the work.
Andrew & Blandon
P.S. If you are thinking about buying a property in the next 12 months, let me know and we can have a quick chat.
Tomorrow you’ll discover The 2 Hidden Criteria for your property investing.