How I Bought My First Investment Property Using Home Equity

A lot of my friends wonder how I got started in property investmenting. They know I don’t have a ton of cash lying around, but all of sudden I have 3 rental properties. They get even more incredulous when I tell them I didn’t have a deposit for any of them. So let me tell you how I did it. Selling drugs, the mark up on meth is amazing!!! No actually, not drugs….two words – home equity.

Let me break it down into 5 steps.

Step 1) Own most of my own home. Easy right!? Now undoubtably this is actually the hardest step. In saying that about 64% of New Zealanders own their own home, not too shabby. Having your own house will provide a lot of security when you retire, but not much in the way of income. Sure it will save you heaps of having to paying for accommodation in your old age but its not going to pay your bills. That capital tied up in your home can be put to work!

Step 2) I built up equity in that house as fast as possible. (When I say fast, this took us ten years). Increasing equity means paying down the mortgage or increasing the value of the house. i.e.get in a flatmate, work overtime, make extra repayments, paint the house add a room whatever it take to get the loan to value ratio of your house down. We upped our payments as soon as the mortgage started and I’ve been inching the amount upward whenever we could afford it. When interest rates dropped we kept our repayments the same paying back more principle than ever before, so far we have shaved 13 years off a standard kiwi 30 year mortgage . The house is due for renovation and by spending wisely we could gain more equity. However I’ve put that on hold for now. The house is perfectly liveable as it is and we need to put our money to work in better ways at the moment. But if you live in a real run down house and you can improve the value by 25% I reckon go for it!

Run down room in need of painting! Renovate to gain equity!
Yeah, a lick of paint might improve the value eh….

Step 3) I talked to the bank manager about a revolving line of credit. When we moved our mortgage to Kiwibank we got a great interest rate, but because we didn’t have much of a loan (compared to everyone else I guess) they suggested we take out a line of credit/revolving mortgage as part of the deal. We wouldn’t have to spend it or use it at all but it would add to our total borrowing allowing us to qualify for a cash back offer. I didn’t let them link the revolving credit to any of our eftpos cards or accounts and so it sat, safely out of reach.

This line of credit can be used to pay the deposit on the investment property you want to buy. I mentioned that I was going to do this to bank manager and he said that idea was ok. You can also work with a mortgage broker to arrange this kind of thing for you. I did the first one myself but since then I’ve used Megin from the Loan Market to make sure I’m getting the best interest rates and cash back deals.

Now revolving mortgages/lines of credit usually have slightly higher interest rates than fixed or floating mortgages but don’t worry I’m only using the revolving credit for a short amount of time. (Less than a month usually).

Step 4) I found a house and got the banks approval to borrow 100% the value of the investment property. We have plenty of equity in our own home so the bank was willing to lend 100% of the purchase price $222,400 in this case. How much you can borrow depends on how much of your house you own i.e your equity. Currently the bank wants you to retain at least 20% equity, more if you are an investor in Auckland. This is a good thing, retaining a decent amount of equity will help protect you  of there is a downturn in the market and property values fall.

With the lending sorted I went unconditional and paid the deposit using the revolving credit facility.

House made with money
hmmm I suspect weather tightness issues

Step 5) I paid back the revolving line of credit. The drawn down loan is split between paying the remainder of the purchase price to the vendors lawyer and paying back the revolving line of credit. The mortgage is at a lower interest rate than the revolving credit so it makes sense to pay back the line of credit asap.

I’m not sure if its the best way or the “right way” and its certainly not the only way…..

And thats how I bought an investment property. I’m not sure if its the best way or the “right way” and its certainly not the only way but its how I made it happen. If you have equity in your home you have a lot of options, talk you bank, broker, accountant for advice! Personally I just tend to jump right into things and sometimes that backfires horribly, so make sure you always check with professionals about finances!

For me the downsides to this method is that properties are used as cross securities against one another (Including my main home! Risky! I’m working on doing something about this, talking to accountant about structures) and not having a deposit makes the cashflow situation a little tighter actually for two of my properties the cashflow is negative. Tauranga is down about -$20 a week and the Auckland apartment is losing about $30 a week. Argh, I should have talked to an accountant about setting up a company. It’s terrifying that I’ve leveraged my home to buy more homes, keep following this blog if you want to see if it all implodes down the line…or if the risk pays off and I can retire in ten years…

The positive side was ease of getting finance and accessing the money we’d worked hard to put into the mortgage instead of having to save a new deposit each time. Also being able to act quickly during a property boom was a huge advantage. We’ve made capital gains of well over $100,000 in one year. The revolving credit facility is still in place and we could use it to finance renovations, repairs etc if needed.

 

My Second Property Investment and How it Also Sucks!

Sometimes I think I’m just too stupid to be property investing. I’ve always said “Learn by doing and then learn some more by failing” well I’m certainly learning a lot this year.

Lucky for me it’s a rising property market and for now my idiotic purchases are being smoothed over by ever increasing property values.

They story begins last July when I got it in my head that I wanted an apartment in the city.

Oh geez why the hell did you think that was a good idea?

Because it was cool and if we moved out of town we’d always have a place in Auckland to use as a base. I spent a month looking and it was just doing my head in. So many open homes. Parking in the city zipping from building to building. I went to an Auction and got outbid by $200,000 (the market was and still is exploding) for a very dated (but excellent location) apartment. My only key criteria was that it had to have car park.

Anyway I’d all but given up on finding a place when a canny realestate agent gave me a call and asked me to come look at apartment. I told him no, I’d refocused my search to Tauranga and I wasn’t looking anymore, but he was persuasive and offered to drive me there himself so I took the bait. He showed me two apartments in the same building, one was vacant and one had a tenant but it was under rented.

The vacant apartment was really nicely staged, I was swayed by cheap furniture and borrowed artwork. Fresh paint and new (cheap) carpet also added to the illusion of a quality apartment. It had all shiny new appliances and had the appearance of luxury.

Photo of staged apartment with modern furniture.
Look how pretty it is!

I decided to make an offer because I thought I could get this place at a reasonable price, all the talk by the agents lead me to believe the vendor wanted a quick sale and that I seeing it first before anyone else so I should get an offer in before the open home that weekend.

Of course it was all talk.

So with a lot of back and forth and agents driving me sale and purchase agreements across town at 7pm to create a aura of urgency and importance we finally settled on a price of 447,500 for a 1 bedroom 67m² apartment with a carpark.

The bank very wisely insisted on a valuation and that came back at 455,000. (Amazingly!). The agents had also “thoughtfully” provided me with a rental asessment of $500-550 per week. I ran my numbers optimistically on a middle figure of $525 and figured it would break even.

I later learned that the place had been bought 1 month before  by the vendor for $390,500 so they made a tidy profit. Even my initial offer would have left them with a tidy sum. The agents were damn good at their job, the whole time making out like they were helping me get the apartment I wanted while driving up the price for the vendor.

Renting it out took a few weeks, it shouldn’t have but the property manager got sick and didn’t really get round to asking any of her colleagues to take over the showings. Then the rent achieved was only $500. I was pretty surprised, but it was my own fault. I trusted the supplied rental assessment and I didn’t do my homework. I didn’t research rental prices in the building or get and independent rental asessment. Unforgivable really when so many property managers will do one for free (in the hopes of getting your business I suppose.)

But there have been some amazing upsides to owning the apartment. The lack of maintenance compared to my other properties is quite a relief. Everything is taken care of by the body corp fees and those fees cover insurance. It really is hassle free. While it was vacant I got to use the car park. That was fun.

The Numbers

Mortgage payments: $22,921
Rental income: $26,000
Body Corp Fees: $3,406
Rates: $1,236

That works out to a nice tidy loss of $1,563 a year. Yes thats right I actually purchased a $1563 debt every year. Are you keeping track of how much money I’m loosing this year? My other rental property is losing $1054. So far thats a grand total of $2617 per annum. Or $50.32 a week. That is starting to hurt my cashflow!

Properties which cost money to hold are not an investment. However, the rising market and capital gains are increasing my net worth. But buying houses with the hope of values going up makes me a speculator and not a very good one. Buying properties that break even are not investments either. Unfortunately I am damn stubborn. I refuse to let it go. So I eat the loss wait for a day when the damn place actually makes me some money.

Any good news?

Well interest rates are low, and getting lower. I split the loan into 3 parts and each will roll onto a lower interest rate in the near future.

Rents are apparently rising. So they tell me. But I really feel that $500 a week is still a fair rent for the property. I will get a professional rental assessment when the tenants fixed term contract ends.

It will only take an increase of $30 a week or a reduction in expenses of $30 a week to make this place break even. I’m pretty sure I can achieve that in the near future..

So what are the lessons here?

Four main things I learned from this purchase.

Real estate agents work for the vendor – Not you! If they appear to be helping you get the deal done, take a step back, is it really in your best interests?

All that glitters is not gold. Staging makes a place look way fancier that it is. Whats lurking when all the glam is gone?

Get independent rental assessments and use the lower figure for running your numbers. Rental assessments, in my opinion, are usually inflated.

Set yourself some criteria. Without criteria its easy to get talked into buying something that won’t work for you. If I was buying an apartment again, it would be, carpark, views, natural light, sound proof.

My First Rental Property Investment – And how it sucks

 “I should invest in property.” – Thought I had one day last year.
Picture of a rental property

Property is such an attractive prospect. With a good property manager its largely passive, there are sweet sweet capital gains and I could see in the future having a few properties could be a great way to provide steady income in retirement. I don’t know about anyone else but I really really struggled to find a property with decent rental returns. New Zealand houses are really expensive and sometimes not great quality. I couldn’t afford anything in my home town (Current average house price – $931,061!) so I had to look in some of the smaller regional towns nearby, I started with Hamilton but the houses I could afford there tended to attract tenants that looked like hard work. After spending many weekends looking at dismal homes I gave up on Hamilton and started looking further afield.

Ariel photograph of Tauranga
The Charming Coastal City of Tauranga

I finally ended up looking in Tauranga (a coastal town with a large port about 3 hours away) and I found a large 2 bedroom home, with a really light and bright living space. It had a lovely feel to it and if I were to one day fully renovate it the results would be a very classy living space. Even in its current condition it was very liveable.

I didn’t have a deposit

Yup, I bought the property with no deposit. I own my home here in Auckland (well a large % of it) so the bank was willing to lend me 100% of the purchase price of this property.

The thing with houses is that the purchase price is just the beginning of all the things you are going to have to pay for. Although I did talk the sellers down from a list price of $235,000 I ended up paying pretty close to that figure by the time the purchase was done and the house was ready to rent out.

Purchase price $224,000

Pre Purchase Building Inspection $517.5
Drain Inspection $230
Legal $900
Drain rehab and repair $3624.1
Insulation and ventilation $2949.61

Total purchase costs $232,221.21

As you can see it cost me another $8,221.21 to get the property ready to rent out. I wasn’t to upset about the prospect of getting these repairs done as I felt I was still getting the property for a good price. The drains were completely clogged and causing dampness around the property but they are fully functional now. I also paid to have a high standard of insulation and ventilation installed. New Zealand properties are notoriously cold due to poor insulation and are often prone to mould issues as tenants trying to keep heat in will not open windows in winter. All the moisture from regular household activities can create an environment that encourages mould growth on ceilings and soft furnishings. It was really important to me that any home I rent out is warm and dry.

And how about those ongoing costs…..

Costs, coins, accounts.

Well lets start with a happier note. The place is currently rented out for $340 a week and they’ve paid on time, every time. Gotta love that.

Annual Rent $17,680

Annual Expenses
Mortgage (principal and interest) $14,736
Rates (property tax) $1,845.90
Property management $1,016.6
Insurance $1,136

Shortfall of  -$1,054.5

So this is why it sucks

I have to pay out $20.27 a week to keep the place going. I also will have to pay out of my own pocket for any unexpected repairs and regular maintenance. It’s a negatively geared property. Its quite common in New Zealand to invest in property this way, however I would prefer to making money! I can offset the losses against my income so I end up paying less income tax, which is nice.




There is some good news!

After one year the mortgage is down to $218,574 and the rateable  valuation on the property is $256,000 giving me equity of $37,426! So you could look at it as spending $20.27 a week to acquire $37,426 which I’m sure you would agree is a bargain! Its been a great boost to the net worth. I was extremely lucky to buy when I did. The market in Auckland had become ridiculously expensive and a lot of young families were looking to move to more affordable towns. The market in Tauranga was only just starting to heat up and I’m sure I got an absolute bargain. You can’t find much for under $300,000 in Tauranga now.

Am I going to keep this money pit of a property?

YES! For now I’m going to hold, I have the opportunity to refinance in February 2017 and I should be able to reduce the mortgage payments. The Tauranga property market is booming and the current valuation of $256,000 is a very conservative number generated by the council when they are determining property rates. If I were to get a proper market appraisal I believe the value would be a lot higher. There’s no tax on capital gains in New Zealand so I get to keep all of the profit.

There’s always the possibility of increasing the rent, my property manager keeps on top of the market and will assess if any increases are justified. I plan on having the property at least cashflow neutral by March 2017. For now I’ll continue to pay my $20.27, which to me seems a small price to pay for owning this assets which keeps on increasing in value.

Actually its not as much of a money pit compared to last year

I did two things this month to improve the returns, I re-evaluated the insurance and discovered I was really over insured and paying too much. I got this bill reduced by $200. I also switched property managers, my first manager was useless and expensive. I finally got fed up and found a company recommended by the property investors association. The price is excellent and he’s a great communicator (which is exactly what you need for an out of town rental). I was inspired to see what savings I could make after reading a post over at Afford Anything about the incredible power of the 1% margin for improvement. The idea that loads of small improvements can make a big difference was so obvious and I felt like an idiot for not optimising my expenses sooner. Yes property can be passive but for the best returns its helpful to keep a watchful eye on things!

**October update

Values in Tauranga have skyrocketed in the last 6 months. My modest property purchased for $224,000 ($216,000 mortgage) in 2015 is now worth $340,000-$370,000. The rent has been the same but my tenants are moving out in a month and my property manager has advised that he can increase the rent. Interest rates are dropping and the reserve bank has signalled one more rate drop before the end of the year. My fixed term mortgage ends in April 2017 so hopefully I’ll be able to take advantage of a much lower interest rate. With the increased rent and lowered interest rates this property should be making a profit next year woohoo!

 

Finding the impossible – The Search for Cashflow Positive Property

I love property but damn this market is weird.

New Zealanders love property in general, we all buy a lot of it and we let heaps of people from overseas come in and buy our property too. PROPERTY FOR EVERYONE! However this has led to a shortage of property in our main city and heavily inflated prices.

City of Unafforadability!
City of Unafforadability! Also this shot is extremely weird, where are all the boats………

There is no cashflow here in Auckland without a massive deposit and most landlords are banking on capital gains giving them returns and are willing to accept a meagre 1-3% rental return! Ouch!

So I’m starting out on a mission impossible… ummm make that mission improbable (please don’t sue me I can’t afford it.)

I’m going to find a property that is no money down, cash flow positive after all expenses paid.

I just heard half the country faint and most landlords laugh but I think it can be done.

First steps – Find the money!

I emailed my awesome mortgage broker (Megin) with a list of my assets, income and investments and asked her to give me a ball park figure of how much money the bank would lend me. Within a couple days I had a figure of $300,000. WOW, thanks bank. Its really important to know what you can borrow  and therefore spend so having a great broker like Megin on your side from the start will make things go so much smoother.

Now this isn’t guaranteed so I will need to make all my purchase offers subject to finance from my preferred bank. I can work on getting pre approval for the finance so I have more certainty.

For great rental returns I have to look outside of Auckland. Long distance property management can be tricky so I’ll also be looking to hire a local property manager.

I’ll need to find a regional centre that is experiencing population growth, has a strong rental demand and isn’t dependent on one industry. Gang towns are also out! I’m not afraid of university towns as long as there are other things going on. I probably want to stick to the north island so I can visit the property if necessary but property management is the plan!

Going against the grain – Others set out to lose!

I will destroy your car
I will destroy your car! – yep these parrots love to rip off all the exposed parts of your car.  Not sure how thats related to this post but you have to be pretty mad to set out to make a loss from property.

It may seem crazy to the rest of the world that a lot of investment property in New Zealand is negatively geared.  Often the rent doesn’t cover all the expenses and the investor can be throwing hundreds to thousands of dollars a month on top of rent collected at the mortgage. In fact I have co-workers who are not even trying to have their property make a profit. Why? Well at the moment you can offset losses against your taxes. But the max you can claim is your tax rate, i.e if you fall in the top tax bracket you can get a refund of 33.33% of your loss. That may be well and good if your loss is on paper only, say from depreciation. However if thats a real cash loss you are still losing a lot of money every year. My co-workers see topping up the mortgage as “compulsory savings” and they are banking on capital gains (which are not taxed in NZ) to eventually make their profit.

The reliance on capital gains and tax refunds frightens me because the government is pretty pissed off with property speculators at the moment and the tax offset could be cut back or even eliminated all together, also tax on realised capital gains has already been introduced for properties owned for less than two years. There could be an across the board capital gains tax introduced at any time really. Its much better in my opinion to be making a profit from day one. I want to pay tax because it means I AM MAKING MONEY, I AM PROFITABLE.

Profits first bitches.

wellington-1090591_1920

My Inner City Rental – Plan for screening tenants

I have an apartment in the city. I bought it, but I barely own it. Somehow the bank lent me ALL the money to buy it. Well, I say somehow but I had heaps of equity in my own home and I got a favourable valuation and purchased under that so they were happy. I mostly manage the property myself and I’ve been really lucky in the quality of the tenants it attracts.

Today I handed over the keys to a really happy couple, full of laughter and just relieved to be living in the city. No more commute for them. They are  even going to sell one of their cars and start walking to work.

keys

Being a landlord actually feels really good to me. My tenants can afford the rent and the rent is satisfactory towards servicing my debt. Win! My tenants need a place to stay handy to work and I need people willing to pay to rent my apartment. Win! I want my place to be well maintained and my tenants want to rent a nice place. Win! I have a car park, they need a car park. Win! Its wins all round. As with any decent business relationship both sides should be wining. (IMHO anyways).

Finding tenants is not something I thought I could do easily so I outsourced it to an agency in the city. They are know as “the” place to go to find apartments but man they are terrible. Just useless. Well they are good at screening tenants and thats what matters (just useless at the admin and communication stuff).

So I need to make plan for next time to screen and assess tenants myself. I’ve made a list of the things I need to attract quality tenants next time. It seems to me to be a mixture of making your property look as attractive as possible so the right tenants apply and covering your butt by doing  background checks and calling references.

My Find Awesome Tenants Plan

  1. Advertising – I’ll advertise on trademe. Cost is $139 – 238 depending on how much extra promotion I pay for. (I’ll need to research if there are other places worth listing the apartment with as well). Good photos are important and I have a set of really nice pictures from when the apartment was staged for sale, I can’t use those forever though so at some point I’ll need to get some photo’s taken. It’s worth getting quality pictures to show your place in its best light, taking a few snaps with your iPhone might not cut it especially if you have to take pictures on an overcast dull day. I’ll lay out all the criteria I require for tenants and list the the paperwork/photo ID they will need for a pre-tenancy application.
  2. Check if any appliances need replacing or refurbishing – The bench top and cook top are on my list for improvements in the next year or two. (Ahhh thats going to be expensive!) The rest of the appliances are near new high end models that should last another 5 years at least. Quality fixtures are attractive to tenants.
  3. Credit checks – I’ll let them know in the advert that all applicants will undergo a credit check. Cost $12-48 each. There are a number of places offering background checks online.
    Tenancy Information New Zealand – comprehensive search, higher fees.
    Name Check – Looks basic but cheap and easy to use.
    Tenancy tribunal records – Free to check.
    Centrix – Cheap, credit reports and tenancy check.
    The application has to include a waiver so you are free to do these checks. Tenancy Services has a very helpful website for both landlords and tenants and lots of forms that I can download including a pre-tenancy application form.
  4. No previous evictions – Never ever, no way no how.
  5. Proof of employment and income – Preference given to those with proof of employment, payslips, employer as a reference etc. Income of the tenants  should be at least 3 x rent. Ability to pay is crucial.
  6. Reference from previous landlord – This will also be included in the advertisement as beneficial for any applicants.
  7. Highlight the buildings location and walk score – It’s close to the city hospital, university and heaps of large corporate employers. You can easily walk to events, shops, restaurants and bars.
  8. Ask “Why are you moving?” – Look for signs of hesitation when answering and general signs they applicant may be not be telling the whole truth. My last tenants moved into the city because their office was relocating to the city. Great Reason!
  9. Check facebook, twitter, instagram, linkedin etc – Social media can give you a lot of insight into a persons character. Are they working? Are they throwing loads of drunken parties? Maybe pictures of their previous address, are they tidy?
  10. If I get a chance check the car – Not how fancy it is, but how tidy it is inside. If there is an ankle deep layer of McDonalds rubbish in the back they are not very likely to keep my place clean either.rubbish car
  11. Plan for open homes – have pre-tenancy forms ready and a laptop connected to the internet. I can do credit checks on the spot and be ready to give potential tenants an answer asap. It will give the impression that I like things to happen quickly (a good quality in a landlord) and that there will be no pulling the wool over my eyes! I will check you!
  12. And finally keep discrimination laws in mind – Sure I can pick who I want but I can’t discriminate based on gender, race, if there are children, religion, sexuality etc. The things I am most concerned with is ability to pay/history of ability to pay and that a suitable number of persons applying to live in the property.

 

Damn thats a hell of a list. But I’m sure I’ve missed something! Have any ideas for a thorough screening process?