Getting prosperous from property

By Andrea Fox

Wednesday 1st December 2004

Whether it's an expat buying up chunks of coastline online, youngsters getting into their first shonky inner-city apartment, or Mr and Mrs Average watching the value of their suburban abode skyrocket, the property boom has made many New Zealanders a whole lot wealthier than they were three years ago.

It's been a phenomenal run and it seems that the silly price gains of the past few years must be nearing completion. But long-term investors know there's a trick or two to making money out of property even when the market inevitably cools. Andrea Fox discovers the strategies of four "true" property investors

Day dream believer
Frugality and hard work led to Lisa Dudson's property success
While her teenage schoolmates dreamt of fame and frocks, Lisa Dudson was working three after-school jobs and planning how to be a millionaire by 35. She managed that by the time she hit 35 last year when she was also named the winner of the inaugural Young Financial Planner of the Year.

Dudson has also succeeded in her other teenage goal of owning her own business. She set up Acumen Financial Planning in Auckland nearly four years ago and is about to merge it with a risk management business. She's the co-author of the best selling The Complete Guide to Residential Property Investment in New Zealand, and a public speaker and tutor on property investment and personal financial planning.

After some heavy selling this year, Dudson is left with about nine properties in Auckland, Huntly and Palmerston North. The profit on a recent sale of an Auckland commercial property with "extremely" strong cashflow guaranteed that she could retire tomorrow, she says. But Dudson doesn't attribute her success entirely to canny property deals, saying it's hard graft, good money management habits and a strong independent streak that's made her wealthy.

The day after finishing her university studies, aged 22, Dudson bought a one-way ticket and headed overseas. There were stints at US ski resorts and a move to London, where she worked at property management, recruitment and IT firms - all the while saving like a demon. On a trip back home she bought her first rental property in Palmerston North, with a $15,000 deposit, which she still owns today. In England she paid 79,000 pounds ($204,400) for a house in Chiswick, with a loan for the total amount. After renovating it, she sold the property in 1999 for 161,000.

On her return to New Zealand in 1997 "with quite a bit of money" from other deals, Dudson bought a house in Auckland's St Lukes, started working and paid off her mortgage as fast as possible. She's often been "geared up to the eyeballs" through property acquisitions, but only buys houses that produce a positive cashflow.

Understanding basic money management is key to successful property investing, she says. The basics, according to Dudson, are: pay off your mortgage as fast as possible, instead of over 25 years; budget (most people haven't a clue what they spend their money on); and avoid consumer debt by paying off your credit card every month and avoiding car financing and hire purchase.

And her property plans? Dudson hasn't bought any real estate since early last year and probably won't look at the market until 2005, as it's been too competitive and good deals scarce. So she's got a bunch of money sitting in the bank and has sold a bit this year. "I've got to the stage of life when it's not about money, it's about time and balance."

In for the long haul
Veteran Hamilton property investor Win Kerry has made plenty out of residential property over the past 25 years
Sixty-three-year-old Win Kerry fell into property investment by chance. Because he prefers working alone, Kerry started looking for one-man businesses to buy. Nothing he saw produced as much as wages and with a bit of money burning a hole in his bank account, he did his investment return sums on a house for sale in Hamilton East. It was in the older part of the city and had been converted into two flats. "It sort of grew from there," he says. Today Kerry and his wife, Trish, have a portfolio of more than 100 tenancies (Kerry points out that a tenancy isn't the same as a property as there can be ten tenancies in a block of flats.) It's still a lot of real estate and the couple look after it themselves.

All the tenancies are in Hamilton where they live. "If you're going to do your own management, you have to be within 30 minutes (of the tenants), so you can get over there quickly if you need to collect rent, or indicate your displeasure."

This year was one of the best Kerry has ever had because of high rental demand, driven by Hamilton's population increase.

But it wasn't because he made a killing selling into Hamilton's booming market. Kerry can't remember when he last sold a property. But neither has he bought one in the last three years. Why would he compete in a hot market?

That's what makes him a property investor, he says, as opposed to a property speculator, who buys a house, "tidies it up a bit" and sells at a premium. Investors are in it for the long haul, and for Kerry that's at least ten years. He buys when the market is flat and the speculators are running for their lives, which they could be in a couple of years, he reckons.

Kerry is focused on wealth creation, which means reducing debt on one side of the ledger and building capital on the other.

"What a lot of people get stuck on nowadays is the advice to buy anything that comes along and (you'll) produce a profit. I totally disagree. You can buy things in the very low socio-economic areas - which on paper will show a good profit, providing you can get them (tenants) to pay." A vacant house is bad news in this business and when rent isn't coming in, debt builds.

So what is the "right" property? Kerry's criteria: easy to maintain, warm with good-sized bedrooms in a reasonably good area. He focuses on the bottom half of the middle value property market.

Kerry looks for a 10% return on a mortgage rate of 7.5% or lower to cover costs. About a quarter of Kerry's properties are freehold. The couple run four or five properties to a mortgage and pay off one or two mortgages at a time. Then they use the freehold properties as securities to borrow against and buy again.

Kerry predicts the Hamilton market will settle next year. It will stay flat and cool in two or three years, which is when he'll visit the bank manager again.

Location, location, location
Angela Jones gives some pointers on what's hot and what's not on house buying.

For those seeking pure capital appreciation, Auckland, with a few notable exceptions, hasn't been the best place in the nation to buy a house for a while. Still, the lure of the big town is spilling over to nearby locales, with places like the Waikato seeing its median house price rise to $210,000 in August from $180,000 a year earlier.

"The thing about Auckland is the population pressures," says Roger Perry, author of AMP's quarterly Home Affordability Index. "If I wasn't going to put my money into Auckland, I would put it into where there's going to be population inflows like Canterbury and Waikato."

With its university, language schools and international airport, Christchurch is likely to keep producing good demand for houses - the median house price there has gone to $218,000 from $162,000 a year ago. Howard Morley, president of the Real Estate Institute of New Zealand, likes the residential property market in Christchurch and Wellington, and also the smaller centres such as Invercargill (up 15% in the first nine months of this year), Hamilton (up 13%), Hawke's Bay (up 10%), Hastings (up 22%) and Palmerston North (up 11%).

Still, there's no point buying in the middle of nowhere and experts note that any further gains in prices are reliant on the ease of getting tenants into your property. While Auckland may be sliding into a rental glut, following the likes of Melbourne and Sydney and exacerbated by higher interest rates, tenant demand in university towns throughout the nation is more or less guaranteed.

"Residential investment requires tenants to make it successful, so you're looking at the minor city areas as well as the major centres," says Morley. "There are other cities, and I'd include Hastings and Palmerston North, that have a strong inquiry into residential and investment property."

What's hot and what's not
Hot - Auckland satellite towns like Hamilton, university towns, anywhere coastal (always and forever)
Not - Dumpy inner-city apartments

Tricks of the trade
Mother and daughter property investors Dorien and Rineke Forster have a few tricks they're sharing with others - for a price.

Fifty-five-year old Dorien Forster and her daughter Rineke, 29, spend half their working week managing their property trading business and the rest teaching aspiring entrepreneurs without much capital how to profit from property. The well-known property investment pair specialise in the "sandwich lease option" - a system they learned in the United States.

Investing glossary, www.investorwords.com, defines a sandwich lease as "a leasing arrangement in which an entity leases property from one party and leases that same property to another party...the entity is both a lessee and a lessor, so it both pays and collects rent on the same property".

In the Forsters case, their company leases a property, puts in prospective buyers, and on-sells the lease and the right to buy the house. Put another way, their company secures first option on the property.

The Forsters, who operate the companies Home Buyers, Global Business Ideas, and Management and More, emphasise they are not real estate agents selling houses. What they do is guarantee rent, while taking care of repairs and maintenance, until the prospective buyers have arranged equity to buy it - which may take up to three years. It's not hard to see the advantages of the deal for an absentee vendor, or one with a property that's not selling quickly.

The sandwich lease option claims that no cash, equity, mortgage, or bank qualifications are needed by the entrepreneur to turn a profit. That, coupled with the potential capital gain on the property, lures students, investors temporarily low on equity, and people who have been "recycled" through divorce or redundancy, Dorien Forster says.

The Forster's internet advertising offers an introductory kit for $39.95, with seminars from $295 to $2,795 per person. They have students throughout Australasia. The pair are currently in America, doing their annual three month property education immersion.

It's all such a long way from Dorien Forster's first dabble in property investment in Petone, aged 34, that her memory of how she got started is hazy. She thinks she leveraged her first purchase against the freehold family home in Petone. With three children under 4 ½ years, it wasn't practical to go to work and put them in care, so she bought a house, bringing the young trio with her while she renovated it.

Her portfolio grew and she became the first woman mortgage broker in Wellington, and a property trader. She defines the difference between a trader and a buy-and-hold property investor as that between a collector of cars and a car dealer.

Forster soon began eyeing opportunities overseas, including new investment methods. Five years ago Rineke joined the business and went to the US to learn more. When the pair had done a few sandwich lease deals here, they started teaching. Rineke's brother Ryan has just come on board.

And don't bother asking the Forsters where the market is heading.

"A lot of our students want to be fulltime property people like us. You've got to be able to survive in the market no matter what it is doing," says Forster senior. "To be an entrepreneur you've got to have a few tricks up your sleeve and we teach all of those."

Financial intelligence
Buying real estate when prices are rising may be dangerous for the unschooled

Graeme Fowler was a 24-year-old mechanic hungry for wealth when he learned his first painful lesson about property investment. With Bob Jones's book Jones on Property under one arm, and a real estate agent twisting the other, he bought the first property he saw in Wellington's Stokes Valley. He lost $40,000 on the two three-bedroom flats as rents in the low-end housing area fell year after year.

But a bit of red ink wasn't going to deter Fowler, who was convinced property dealing would make him rich. Today he's 40, twice retired, and wealthy enough to make it thrice if he knew he wasn't going to be bored silly. He lives in Havelock North and has bought 100 properties in the past four years. He currently owns about 60 and deals in both long-term rental properties and do-up sales. He also owns the Mr Rentals home-appliance rental franchise in Hawke's Bay and has half shares in the franchise in Palmerston North and Wanganui.

Fowler's first investment bombed financially because he was knowledge-poor and didn't have investing rules, he says. "It wasn't failure. It was just what I hadn't learned." By the time he sold the Stokes Valley property seven years later he was a high achieving real estate salesman in Wellington and had sold a successful network marketing business. But it is knowledge, not money, that makes a successful investor, he says.

"The higher your financial intelligence, the less money you need. Now, if I lost everything, I wouldn't need money to make more money. I would start with a business first and build up a good cash flow to put into property. A lot try to make money solely on the property and struggle. If you can't save you're relying on capital gains, which I think is very dangerous."

Fowler, who this year produced a book on property investment, New Zealand Real Estate Investors' Secrets, banks on a property's value falling after purchase. If he gets a capital gain, that's a bonus. All his property loans are on a principal and interest repayment or revolving credit basis, which increases his equity every year, he says. Investors who plan to pay off the interest solely with any capital gain, risk losing any benefit if that doesn't happen. Continually borrowing 80% to buy and sell in strong markets is also dangerous, he says. If the market drops 20%, you can lose everything when the bank decides you're overextended.

Fowler believes it's important to fix interest rates, he doesn't try guessing what floating rates might do. But if rates rose too high, he might sell some property "just to ease my mind a bit". When purchasing for a long term "buy and hold" strategy, he shops for a property that'll need little maintenance and was built after 1960. A sell-on proposition can be a lot older.

Up until recently Fowler managed all his properties. Now he has a manager so he can concentrate on doing what he's best at - negotiating purchase deals. That's where the money is made, he says.

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