Hi Olly

It’s great you have given us the chance to ask questions thank you. My apologies in advance if this is a stupid question. We bought our house 4 years ago in Titahi Bay and currently have a mortgage of 247k with rv of 315k. The part we are in is a reasonable part – quiet and owner occupied but other parts of the suburb are not so great. We are thinking of a move to a smaller city (W*) in a year or so (not definite) and also planning on kids and dropping to one income.

We are concerned about the amount of mortgage repayments rates and insurance (plus maintenance) on one income. We are tossing around the idea of selling now and renting or buying something smaller or buying something in W* to rent out till we moved there. We don’t have to desperately sell right now but don’t want to be stuck in year or so having to sell. What are your thoughts? Are we best to wait and try and sell in a year or so or try and sell now?

Vanessa

Dear Vanessa
If you are going to sell you may as well get on with it as it will likely take a few months anyway. But you have to be sure that you want to move to W* so don’t start until you have made your mind up. I would rent in W* for a start as it will be cheaper than owning, and you can see how well you cope on one salary and a little one to feed.
Best of luck
Olly

Hi Olly,
Love your question service !!!

My investment property mortgage is due for renewal – and I’m leaning towards leaving it on floating rate – do you think the floating rates will increase next month after the ocr review?

The property is in Onehunga – appreciate your views on this suburb in regards to capital gains?
Thanks again,
Choc

Dear Choc
I would leave the mortgage floating for the moment as fixed rates are so much higher. I think interest rates will climb very slowly if at all.
Onehunga is a very popular suburb because of its age and village atmosphere. It is high on the list for long term gains as compared to the chilly-bin boxes
in some of the outer suburbs.
Cheers
Olly

Hi Olly

Our home loan (ASB) for our rental property comes of a fixed rate of 9.05% in July. I would like to re-fix the loan ($301,876) for 2 years at 7.30%. My husband says we should take advantage of the floating rate of 6% for a while and fix it once it starts going up again. I say the fixed rate would have increased at the same time and we won’t gain anything by waiting and we should lock it in now. What would you advise us to do?

Thanks
S

Dear S
I think stay floating for a few months yet. If there are strong signs of yet another interest rate rise then fix for 1-2 years.
I am not convinced that the economy can stand more interest rate increases this side of Xmas.
A lot depends on what happens overseas.
Regards
Olly

Hi Olly
What is your opinion on the future of the Whangaparoa Peninsula and in particular Gulf Harbour? Prices are comparatively low compared to the boom days and with Baby Boomers retiring over the coming years would it be a good place to look at?
Thanks
GB

Dear GB
I have a lot of confidence in the Whangaparoa/Orewa area and I think a lot of people will think likewise.
With excellent beaches views and first rate motorway to the city it has to be a good area to invest in.
Gulf Harbour is a little slower as it was over built — and there were some pretty shoddy building jobs done.
Anything near water and views has to be good.
Regards
Olly

Thanks Olly. I appreciate your opinion. Regards,

Hi Olly

Just finished (and really enjoyed) The Day The Bubble Bursts. Makes a lot of sense…

However, I’m a bit confused now after reading your articles from the last couple of years. I would’ve thought that we’re now in a situation very like what you described in The Day The Bubble Bursts as signalling impending major problems, but you don’t seem to be predicting a significant drop in property values.

I’ve probably misinterpreted the book and/or the articles, but I’d really appreciate your clarification on this point!

Thanks for the book and any response to this question,
Joe

Dear Joe

The bubble burst around the world with the Global Crisis, and collapse of many finance houses and companies both here and overseas. The property price crash in NZ was with the developers ( e.g. shoe box apartments) and it was only the low interest rates environment and the shortage of housing that stopped it spreading further. As at this moment I think the market will remain flat for a year or two with good buying opportunities in the mean while.

Regards

Olly

Hi Olly,

In the US, they have apartment buildings where you can buy the entire building, and the cap rates are at commercial rates. They seem to be good for cash flow if you can manage them well. Safer than owning other types of commercial property I guess. The problem is, we don’t appear to have too many of this type of real estate here, if any. What would be the best alternative we have if we want cap rates (cash flow) at commercial levels?

Thanks for any help with my question
J

Dear Jason
If you have the money there is nothing stopping you buying up all or a great part of an apartment building. I know of several USA citizens who have do this.
But its not all peaches and cream. One gentleman and his wife I spoke to quite recently bought a 450 apartment block in New York. The returns were around 8% net which is huge for the USA. This was an existing block and only too late they discover that many of the units were under rent control. Over the years they have slowly renovated and sold down. The rent control turned out to be a bonus as by the time they could sell the apartments they had appreciated 400%. It was a 30 year exercise but well worth it. They now spend 3 months in NZ. 3 months in Switzerland and cruise the world in between.
Regards
Olly

Hi Olly

What does your crystal ball say about property values with particular reference to the Auckland Apartment market?

Leonie

Dear Leonie
The apartment market was grossly over valued a few years ago and now its grossly undervalued. If you can afford it, buy any good freehold apartment of at least bedroom or more, with views and a car park and over 50M2 in size. Avoid those that are a part of a hotel pool or the like because of possible GST issues. Guaranteed rents are to be avoided as well as they are usually over priced and yu end up paying for your own rent.

Regards
Olly

BigSheep asks:
Hi Olly,
Would very much appreciate your advice here. Have done some residential investing and have a positive cashflow portfolio with >50% equity and now looking to buy Commercial for the first time – the property is in the retail centre of a provincial NZ city, main street, good position, building divided into 2 with two separate tenancies, both new for 8 years, one with an international retail/optical company and the other a retail shoe store moving in to fill a hole for this in the city. I believe these are good tenants and there is a sound business opportunity for each of them.
1. I understand that rates, insurance and interior fitout and maintenance is provided by the tenant – is this std in a commercial lease agreement? 2. It appears I can get it with 8-9% gross return on purchase price – is that reasonable? 3. Do banks charge different mortgage interest rates for commercial properties compared to residential?

Many thanks

Olly replies:
Dear BigSheep.
I cannot do justice to your question because the details you have supplied are woefully insufficient. Any purchase of any commercial property needs proper analysis of every page of every document and detail.
The purchase of a simple house is complicated enough but a commercial investment is one that only professional advisors should answer.
Typically when one of my clients wishes to purchase a commercial property it takes some time to gather all the information and it is sometimes staggering how an apparently good investment often turns out to be a dud, and vice versa.

Taking your situation in particular I have questions for you.
1. Provincial Town? Not good enough. Some provincial towns are dying and others a doing OK. It varies enormously whether such a property is in Huntly or Hamilton, Taupo or Taihape, or Tokoroa or Thames etc.

2. Good tenants? How do you know? Have you seen their accounts? Statements of Position? Previous history? Any PG’s

3, Divided shop? Has this been done legally? Have you checked with the Council?

4. New 8 year leases? Really? Somewhat unusual. Are there rent reviews and /or rent renewals during the term? Makes all the difference.

5. Rates, maintenance, fit outs? Is the rent based on the bare shell or on the the fit out? Who owns the fit out? Makes an enormous difference to the rent. And there is no such thing as a “standard lease”. The common lease is the ADLS version but which version- there are many? All leases can be re drafted to suit in any event.

6. 8%-9% may be a bargain or a jack up. How do you know if the rents are below market or above market? May be they have been hydraulicked? Take care.

7. Gross return? A gross usually means the landlord pays all expenses including GST . Do you mean net return? Have you allowed for all expenses to get to the net return? That’s the only return that matters.

8. Banks usually charge more for commercial and lend less- but not always. That needs sorting as well.

I could go on and on but I think you get the picture by now. The best advice I can give you is to get hold of an independent and experienced advisor such as myself, be prepared to pay a fee, and do the job properly.

BigSheep asks:
Hi Olly,
Thanks for your comments Just wonder if you can explain what Hydraulicking is? After further research something just doesn’t ring true with this deal – which is in Wanganui – a building 2 doors down is very similar – (similar age and size, divided into 2 and has telecom and a bookshop as tenants BUT the rent is less than half of what is being claimed here) – I agree an 8 yr lease is unusual, there are no renewals or reviews in that time, the rents appear well above market, but tenants have signed such a lease – I don’t know what being hydraulicked means but suspect its when the rents are somehow made to look higher – I believe that is the case here. BUT there is a lease signed with new tenants – the price being asked is $1.2Mill, RV is $450k, rent is $99k/yr, building was bought in 2004 for $250k… The mentuoned building 2 doors down was valued last year at $520k – something fishy here.

Olly replies:
“Hydrauliking” is the expression used to explain rents or asking prices that have been pushed up over the market rate. It has been known for some sellers to get the tenant to pay more than market rents and to refund them the difference in private. That’s why it is so important to check all the details out professionally. I have had many clients sucked in by this method and there is little that can be done without facing a massively expensive court case. One of the most blatant cases I handled was where an investor bought an industrial property which was offered with a rental of $120k p.a net. He paid $1.45M for it (8.3%). The day after he settled for it the tenants closed the doors and vanished. At that point he consulted me and investigations showed that the actual market rental should have been $70K ($850K value approx). The cost to take the vendor to court would have cost a fortune with less than a 50/50 chance of winning. He chose not to pursue it in the end and suffered a $600K loss for his pains. Had he seen me in the first instance he would never have fallen for this old trick.
Cheers, Olly

FH asks:
Hi Olly,
This is an expensive and painful lesson, it clearly indicates that commercial investing needs very carefull DD before signing the dotted line, in this instance could the purchaser not found out what the likely rent could have been from a company who leases on behalf of investors?
Surely this is not hard to find out, would have also uncovered the true return.
FH

Olly replies:
Quite right FH – for some reason some investors blind themselves to the truth because of their desire to purchase – no matter what.

Time and again you see how smooth talkers seem to hypnotise people into opening their wallets without thinking of the consequences. In fact they go out of their way to avoid being questioned on the matter at all.

What seems to be happening is that people love to dream and buying the dream is a close as they can get to the reality.

Much like buying a lotto ticket where the chances of winning are virtually the same whether you buy the ticket or not.

Look at the people who fell for the BlueChip con-job, the Nigerian letters, the acia fruit juice franchise or the US tax liens rort.

And if you warn them they accuse you of being a dream stealer and resent you for it.
Olly

FH asks:
Olly, I appreciate your honesty on this subject. And having your post bring this out for people to see what can go wrong when you go into property investing without proper research is really great for newbies starting out.

I was fortunate enough to find people who I trusted to ask for advice when I first started out. It took me a while to decipher which information I was being shown was good and suited my style, and for me is very important in deciding which stategy to use and who you decide to get advice from. I read a book recently and it said many people often shout loud statements but if you really listen its what they dont say that tells you about there real motivation, listen for the little things and you will uncover a lot about a person.

I believe that many people like you say see the dream and it somehow blinds there common sense, instead of taking a step back and really looking at what they are getting themselves into. I made mistakes in my investing but look back on them now and are gratefull for them, I now know what I wont do next time, I will live to invest another day, but I think if I lost huge sums of money it may have dented my confidence too much. Then again how big a lesson would you learn from losing lots, quite a big lesson I think.

Anyway getting way off track, just wanted to say thanks for all the great replies, it is great to read thru them and pick out what is relevant. We need more positive posts like this one to help us move forward.

Keep up the good work. FH

Choc asks:
Hi Olly,
I have invested in small commercial and found it to be most satisfactory. My initial yield on one property was over 12%. Obviously that has fallen as property prices have risen. I have found tenants of commercial tend to be decisive and very easy to deal with. Contrast that with the more emotive nature of residential investing.

The banks are obviously less accomodating lending usually only up to 60% (sometimes higher in the boom but I wouldn’t expect that now). That doesn’t help if you are just starting out and deposit is an issue.

I read a very good article a number of years ago about property and the ripple effect. Notably the further you go from the centre (say Auckland city centre) the bigger the ripple. People will always desire to be near the city and this drives demand; reducing the downsize when they come.

The best advice I ever got was always buy something you would be prepared to live in, as one day you might have to.

Olly replies:
choc: The best way to get into better quality residential properties is to treat the cheaper homes as “stock” to buy and sell for straight profits in order to build up capital. Any rents collected on the way merely oils the wheels. You will likely be liable for tax- but so does any business that buys and sells for a profit.
Cheers, Olly