FAQ
Frequently Asked Questions
How can I afford to buy an investment property
All you need to be able to afford an investment section is $5000 deposit and the ability to pay the mortgage each month. For a Development you require just 10%. With Vendor finance the loan amount is fixed over a period of 10 years & up to 40 years. If you build something on the property that can be rented for some form of income, the IRD refunds some of the taxes paid. The tax refund helps cover most of the interest. A very small outlay may be required from you to support a section (typically less than $100 per week depending on loan size). For a development you will require development funds.
The property appreciates at 10% on average per annum (ie. double every 10 years). You access the increased capital value to buy more properties (4 or 5 over 8 to 10 years works well). At some stage in your life you may sell a few properties and repay all the loans.
How much will I have to pay each month
The amount you need to top up the mortgage each month will depend upon the price of the property, the size of the loan, interest rate on the loan, other expenses such as rates & insurance & your personal income and whether the property remains an empty section or you build a rental building on it. The aim is borrow all the money required to purchase the property and to have the property pay for itself after you have received tax rebates on your income, however with high interest rates at present and rents not yet catching up to the interest rate increases, with a rental building, typical top up is around $100 per week after you have received tax rebates from IRD (which you can get in your weekly pay packet).
For your $100 per week, your asset will typically be earning you $500 -$700 per week when capital gain is considered. That's a "No - Brainer" as far as most people are concerned !
That's a fantastic return on your investment, it's low risk & it remains Tax free (unless you begin trading your properties).
For a section with no income, then the monthly costs are the normal mortgage & rates, since you have no rent or other income to help pay the mortgage, or that can be used to claim a rebate from the IRD on your income.
Similarly, a development will have holding costs of interest, plus progressive development costs, these are generally financed by a loan for the period of the development, and repaid by selling off a part of the development. The rest is usually kept for ongoing income and capital gain. You can use that capital gain by borrowing against it to purchase further property and have several properties growing.
What if I don't have a property now
To secure an investment property, you require a $5000 deposit (for a Development you require just 10%). The rest of the section purchase price is borrowed against the property itself and financed by the vendor (up to 40 % for a development). So if you don't currently have a property, you can still finance an investment property if you can come up with the $5000 deposit, either as cash savings, borrowings against other significant assets (boats, cash investments, shares etc) or by obtaining security and borrowing against some-else's property (parents, partners, friends). In these days of high prices for first homes, it can be very economic to rent where you want to live while you own an investment property elsewhere, often at a lot lower cost than it might cost to own a property where you want to live, e.g. live in Auckland, invest in Invercargill.
Yes, $5000 see above for alternate ways of funding the deposit (for a Development you require just 10%).
What sort of property should I buy
The type of property depends upon your personal circumstances, and the location, however in general a section that allows the building of a 3 - 4 bedroom Brick & Tile low maintenance type house with double garage on their own section will be best for rental or resale value in a typical residential area, while a duplex unit would be better if building for rental income.
The properties must be in a good location : high growth area, or an area expected to become high growth, good population base, good employment base, good facilities nearby, schools, transport, shops.
If the property is to be managed for you, then it is essential to have a good property manager.
If keeping as a rental, The properties should be Brand new because the depreciation allowable by the IRD is 20% higher for a new house than for a used one. This is important in making the weekly cash outlay as low as possible.
Older Houses are likely to have already depreciated significantly, leaving little to claim back as ongoing depreciation.
In Auckland, some apartments do stack up as far as rental returns, but may be less likely to achieve high capital gain. This type of property can be used to provide cash flow to support a property elsewhere that may expect better capital gain but gets less rent.
The properties must be in a good location : high growth area, or an area expected to become high growth, good population base, good employment base, good facilities nearby, schools transport, shops. All Properties have been through a rigorous assessment to ensure the likelihood of it being a successful investment is maximized.
I don't have time to research the right area
This is where we have done the homework for you.
It is in the interest of the Company, since the future of the Company relies on the performance of the investment for the client. Good performance promotes repeat business, bad performance will see client selling the property & no repeat business.
We put our money where our mouth is and stand behind our research by purchasing the land in the areas identified. We aren't acting as sales agent for someone else's property, we sell our own property. This is a huge incentive to Get It Right.
I don't have time to manage a property
This is exactly where a good Property Manager fits in.
If the property is outside the area you live, then a Property Manager is essential.
If the property is local then you have the choice of managing it yourself or using a good Property Manager.
I already have a Business why would I want a property
The Seriously rich use a three pronged approach to spread risk & generate Passive Income:
1) Own a business to generate cash, reinvest back into the business, but also spread the risk by investing some of that cash into shares & property for long term return.
2) Use the share market to generate cash flow. Use that cash flow to support property that does not support itself through rent, but is expected to achieve good capital gain.
3) Invest in property split between high rental return property that may provide low capital gain & high capital gain properties that may not provide good rental return.
There are other very good reasons that business shares & property work well together, the main one is tax efficiency.
Property gives tax rebates & allows losses to be offset against personal income. Unless you are a share trader, it is unlikely you can do that with shares.
Unless the company is an LAQC you cannot do it with a business, & even with an LAQC, the shareholding of the business determines the split of any offsets.
The Structure you want for your Trading business shareholding is likely to be different to that wanted for Investment Property. Generally you set up a trading company to isolate the shareholders assets from the business assets in order to minimize the Risk of shareholder loosing their assets in the case of business failure. Using an LAQC as a trading business would negate the whole purpose of setting up the company.
However Combining your Trading Business with a second Property Business as an LAQC can be a very lucrative money maker.
Get Financial advice on how you should set up your business and property affairs.
I have shares, why would I want to have property
See above - invest in Shares for cash flow, Property for long term growth.
Of course share prices can be a lot more volatile than property prices & companies can completely collapse, meaning a total loss of your money (Share index currently down over 25% from Nov 07, Bear Stearns shares trading US $170 end of last year, sold mid Mar 08 US $2).
Property can't completely collapse - at worst you get left with an empty block of land which is probably still appreciating.
Gearing (ability to put up $1 to get control over investment of $1,000... $10,000... $100,000.. ) for property tends to have a much lower risk than gearing for shares, and gives a more reliable return..
It could cost you $6000 a year to subsidize a $400k property, on which you may gain 10% ($40k) in capital growth (or no capital growth, or negative growth. either way it will cost you $6000 per year).
The same $6000 could be used to buy shares directly which may gain lets say 20 %,so that's $1200, or loose the same 20%
Or use $6000 to get $600k of CFD (Contracts for Difference) & make 20% on that, that's $120k, or just as easily loose the same 20%, so you just lost $120k, not just your initial $6k !! Very High Risk with potential for high return.
From hundreds of years of history averaging 10% growth per year, it is obvious that you are more likely to make the $40k on your property and it is a whole lot less risky.
How long does it take to get a property
You can buy a property in a week if it is already completed.
If buying off plan, it depends upon what stage the development is at. For some it may be 3-4 months to completion, for others 12 months or more (during which time you are probably getting capital gain).
In some developments that are built in phases, it may be possible to buy off plan a development that is not due to be complete for 18 months or more.
How long does it take to make money with property
Making money with Property Investment (as opposed to Trading) is about buying the right type of property in the right location.
It is also a medium to long term investment 5 - 10 years minimum.
You can make money on an investment property the minute you settle it.
It may be a capital gain between when you agree to buy it & when you settle.
It may be that you are able to buy it for less than it is currently valued at (similar effect to buying off plan & waiting, but without the waiting) e.g. someone needs to sell quickly.
It may be that the rent on the property you are buying covers all your costs & more, so you make money each week (although this is less & less likely at present with high house prices).
History has shown that on average good quality property rises by 10% per year,
or put another way, it doubles in price every 10 years.
We have seen doubling in 5 years or less in some areas, while for example 1 bedroom apartments in Auckland's CBD have struggled to make 5% a year for the last 3 or 4 years. (a good example of wrong area or wrong type of property)
Quotable value http://www.qv.co.nz/ will give you the latest growth rates.
But on the whole the property cycle is 7-10 years from one peak to the next peak.
Your aim as an investor is to use that cycle to buy well & hold while your property appreciates in value, so that after a couple of years it has gained in value enough to borrow against for the deposit on the next property. Do this several times and after 10 years you now have numerous properties which are appreciating in value. you may choose to build on them in order to generate better income, i.e. you have a Passive income.
Remember the Big Picture & what it is you are trying to achieve. Don't get overly concerned about the little things.
Because you are buying for the long term, and history has shown an average 10% increase, and while it is desirable to get as low a price as possible, it is more important to consider the strategic value of the property than the actual cash price paid.
If you pay a little too much for the Right property, it is not really a big issue as you will soon recoup the value through capital gain, tax credits or maybe even rent.
If you put off buying something because you think you can find something cheaper that is just as strategically valuable, that's good if it happens.
More often than not you don't find the bargain and a year later you still have no asset & the prices have become even more expensive.
Meanwhile the person that may have paid a little too much has already recouped the overpayment and have an asset that has probably appreciated twice as much as the overpayment. Thus they have even more equity they can draw on to secure their next property, ie. they are onto their second while you still can't make up your mind on the first.
Who do you think is going to be financially independent in 10 - 15 years time & who is still going to be waiting for the Bargain to appear ?
Should you need to, it is also feasible to sell off a property or two in order to pay off the mortgages on the others.
(Be aware that if your intention of buying the property at the start is to make money on it by selling, then the IRD would most likely class the proceeds as taxable. Be sure you obtain financial advice & record your intention before you purchase).
How soon can I sell my property
The Property is yours on the day you settle, so should you need to, you can sell off a property at any stage.
(Be aware that if your intention of buying the property at the start is to make money on it by selling, then the IRD would most likely class the proceeds as taxable income. Be sure you obtain financial advice & record your intention before you purchase)
While we all find our circumstances change from time to time, your intention as a passive investor should be to buy and hold the property (leave the trading to Active Property traders- that's a whole different game with lot higher risks)
Unless you are developing with the intention of selling parts to pay for the rest, then selling should be the last option (even with loss of job etc) and can often be avoided by actually borrowing more against the built up equity you have in the property. The extra borrowings are used to make monthly interest payments (on the existing amount plus the extra borrowings). Its much more tax efficient to do that than to use your own tax paid cash.
If necessary, on a development property it is also possible to resell the property prior to settlement.
Face it, there are only two things certain in this life: Death & Taxes
Believe it or not having to pay Tax is good - it shows that you are making money, however you are only required to pay the correct amount. As an investor, it is your task to legitimately increase your Wealth and pay Tax only on what you are required to pay.
In the case of properties with buildings that can be rented out:
Profits on rental income are taxable, however in practice most rental properties run at a tax loss, i.e. the rent does not cover the outgoings (mortgage, rates insurance, depreciation etc).
However structured correctly, a lot of properties can break even on cash flow and only make a loss when depreciation is brought into the equation. i.e. they cost you no real cash to hold month to month, the depreciation only catches up with you after a number of years, e.g. carpets need replacing, appliances need replacing etc.
So the structure of the ownership & the borrowing is very important in determining if you get tax rebates, or pay tax on rental profits. If you are making huge losses after your tax credits and they are not being offset by capital gain, then you need to seriously look at your business.
In the case of empty sections, the profits made on the resale of a section will most likely be taxable unless you can show that your original intention was to build on it for rental purpose, or have some other way of generating income off it -
- grazing, trees etc.
As discussed above, profits on the sale of the properties may or may not be taxable depending upon your intention at the time you purchased & whether or not you Trade property as opposed to Invest in it.
You must seek financial advice appropriate for your situation.
Depreciation is the natural reduction in value of items over a period of time.
We all know our cars loose value every year, well so do our houses.
Property prices generally grow because of the increase in land value not the building value.
Depreciation is claimed on the assets that loose value (building and chattels -carpet, curtains, appliances etc), it is not claimed on the land, since land does not generally depreciate.
The IRD want us to claim depreciation each year so that we don't have big claims every 5th year or whatever, eg. carpets in a rental property tend to need replacing every 4-5 years, so we can claim the gradual loss in value each year rather than a total loss after 5 years. This also tells us what our buildings & chattels are really worth each year (book value).
One of the major reasons it is economic to carry the monthly cost of an investment property (with building) in its early stages (during the time rents take to increase) is because of the depreciation that can be claimed. It provides cash rebates today, while it is probably not necessary to actually spend it for a number of years. These cash rebates can be used to make up the difference between the mortgage and the rent each month.
Depreciation on a new asset is 20% higher than an old one, which is a major reason to buy/build a brand new property. Most of the time buying a property with older buildings will cost a lot more each month in cash because the same amount of rebate cannot be claimed as can be on a new building.
A difficulty can arise if the property is sold and the depreciable assets (building & chattels) are sold for more than book value, in which case there is a profit on the assets, which is taxable (ie. you have claimed more depreciation than has actually occurred). Thus it is important that before you buy or sell, you have a proper valuation that identifies the land value and the asset value separately.
Remember as an Investor your intention is generally to keep the property except in exceptional circumstances, otherwise you risk being classed as a Trader. So if you are thinking that you won't claim depreciation because of a tax liability on profits from the sale of assets in the future, then you have much bigger issues than a bit of tax on asset profits. Your attitude shows your intention is to sell the property for a profit, which makes you a Trader, in which case the profit on the whole property is taxable, not just a profit on the depreciable assets.
ALWAYS REMEMBER THE BIGGER PICTURE, WHAT ARE YOU TRYING TO ACHIEVE WITH YOUR PROPERTY?
For most of us it is FINANCIAL INDEPENDENCE from a PASSIVE INCOME (ongoing rent).
All of these issues are easily taken care of by your professionals (Accountants, Valuers etc).
You must seek financial advice appropriate for your situation.
How do I know the property is worth what I am paying for it
All Properties offered are sold at the price set by Registered Valuation by independent valuers at the time of signing the agreement.
If the property is already built, that will be current market value.
If the property is yet to be built, 2 types apply
- empty section &
- section with permissions & plans to build
For an Off Plan valuation of a building, that valuation will represent what the valuer determines the property would be worth TODAY if it was already completed, Not a guess of what the market price may be in 12 months or so.
Thus in a rising market, by the time the property is due to settle, it is common for the property to have gained a further 10% in value, yet settlement price is what was agreed 12 months earlier.
Should the property be worth no more when you settle, then you have still not lost anything.
Should you think the prices will somehow drop & you end up paying more than the property is supposedly worth at the time then you have 2 things to consider:
- when you signed up you had already determined that the numbers worked so the actual value of the property is no longer relevant
- you bought the property as a long term investment & it will rise in value over several years
Is my existing house safe
Ideally our aim is to avoid putting up any personal security for the purchase of a business asset, which is what an investment property is. However, Since our aim is to 100% finance the investment property, for maximum tax efficiency, rather than using any cash we may have available, it is likely that our personal assets will be used as security.
When borrowing from Banks, they will try to secure their lending in every possible way. This will generally mean they try to take security over your home, either by way of mortgage, or by personal guarantee, or both. In the case of a company borrowing to buy an investment property, the banks will generally try to get personal guarantees from the company directors if the company does not have sufficient assets by itself.
So even with an LAQC (a company for which shareholders take on the liabilities of the company in exchange for being able to claim any losses against their personal income) it is likely that you will be putting up personal security (your house or other assets)
So it is essential that you obtain good legal & accounting advice BEFORE signing away your personal assets to any lender.
Your personal assets are only put at risk in extreme circumstances, such as inability to pay the loans secured by those assets (home loan or investment property loan), inability to sell any of the assets used as security (investment property or home).
It takes time for things to get in a state so bad as to result in either of the above, & part of the initial financial setup is to ensure you have sufficient income to cover short term debts, or sufficient borrowing capacity to borrow more to cover any temporary short term debts. This is where spending time with our financial specialist is essential in the setting up of the correct structures and borrowings.
Even in a so-called housing slump, it is generally those that have not properly planned for adverse effects that can get into trouble.
A downturn in house prices does not affect an investment property owner unless they want to / have to sell it.
Rents do not immediately follow house prices & in fact often go the opposite direction, so if the numbers worked when you bought the investment property, they will still work during a downturn, & will work even better over time, as rents increase.
Even in a significant downturn, the value of your assets, House & Investment Property are still most likely well in excess of your borrowings. The banks don't like you having loans that amount to more than 70 % of your total asset value, (although 80% is obtainable). Your goal should be to get below 60% eventually, this allows plenty of room for house prices to fluctuate without putting you under any stress.
Thus the risk to your house is minimal and only poor management will increase that risk.
SEEK ADVICE before the situation gets bad.
What happens if the company collapses
The Company is independent of the Builder & independent of the Property Management company & the Mortgage Broker.
It has land assets that are fully paid for. Therefore it is unlikely to collapse, as it has nothing to force it to that state.
In the unlikely event of it happening:
If you have settled your property, the collapse will have no effect on you other than you won't be able to buy another good performing investment property from us. Your property is yours, its freehold, the loans are with a third party lender and it is up to you what you do with it. Either you manage it or someone else manages it, either way, The Company has no tie to it.
If you have not settled your property, i.e. you paid a deposit for a property to be completed, your deposit will be in the solicitors trust account & will be refunded to you.
Should the property be part completed, then it is likely that you will be asked if you still want to complete the build & you will come to an agreement between you.
In any case, if you have settled the property, you still have the property. If you have not, you get back your deposit.
How do I know I won't loose my deposit
Deposits are put into a solicitors trust account. The only exception is if you contract out of that situation & allow something else to happen to the deposit. Always seek legal advice before doing anything like that.
Money held in trust does not belong to the company, it is still yours, so even if a company collapses, no money held in trust can be claimed as part of company funds.
If money is stolen from a Solicitors trust account, the District Law Society Insurance policy covers it.
I see other Property Businesses in trouble
Business failures are a fact of life.
There is risk in everything the average person does every day (eg. driving a car), but that does not mean we do nothing for fear of risk (do you postpone driving your car to the local shop just because there was an accident on the motorway 50 km away?). Any smart business person will ensure that the risks are minimized.
You must always make your decisions based on FACTS not opinions.
With Investment Property you are running a Business and are making Business Decisions.
If something works based on the facts, and you know the risks and take steps to minimize the risks, then make a Business decision, not an Emotive decision.
Don't let the failure of one business stop you from dealing in the industry altogether, take it as a warning to make sure you look carefully at all aspects of your deals.
Would you not buy a car that you wanted from one company just because you saw a different car sales company collapse ?
Would you stop buying food because the local dairy closed down ?
Of course you wouldn't.
Different Businesses work on different Business Models. The same way each family operates differently, with different internal rules controlling what is and is not acceptable within the household, quite independently of the laws that govern the country. Sometimes some models work fine until something unexpected happens, or people get greedy, or do something they shouldn't.
If you know (as we do) property is a good investment, it is irrelevant who collapses & who doesn't. It is only your deal and the details of it that is important.
Is your property in the right place, is it the right price, is it the right type of property, will it be managed by the right person, will my money be protected, etc.........in the end you are buying A Property, not the Business of the Property Vendor.
Do some research yourself,
Satisfy yourself with the Facts,
Look into a company before you hand over any significant amount of money to them.
A simple check of ownership will often tell you a lot, go to http://www.companies.govt.nz/ and search the company shareholders records. Your Accountant or Lawyer can also help, often with first hand experience in dealing with a company.
Above all, take a company collapse as a lesson in risk minimization, not The Total Collapse of a perfectly viable Industry.
As an investor, once you own the property, and have rent coming in (if any), the only effect that a drop in house prices has is to stop you borrowing more against it to buy another. In fact if prices should drop (which they hardly ever do with good investment property), that is exactly the time to BUY.
Fortunately, in practice, the investment property is the same one that first home buyers want, & by design will be in good growth areas with good facilities etc so is always in demand. What tends to happen to these houses in a tough market is that they stop increasing in price as fast as they used to, but vendors will usually just hold out until they get an acceptable price. Occasionally you will find vendors in real distress & may pick up a bargain, but the whole of the property market is not in that situation. If you work on that philosophy, you will always be waiting, will never buy anything, & have lost out on the capital gains that all the smart investors will have reaped in the same time you sit on the sidelines insisting the market was going to collapse.
Remember also that Building costs continue to rise. Each new lot of houses is costing more due to material cost increases, council compliance cost increases, labour increases etc.
For a builder or developer to be discounting their property, (which is generally so they can pay their bills today), their profits are being sacrificed. Sometimes they must even sell at a loss. In order for the business to stay viable these lost profits must be recouped in the future, ie. the prices must go up on the next lot of houses.
So while you may see a short period of discounted property, it is likely to be followed by rapid increases.
This is easily noted on this graph, along with the proof that prices have doubled in 10 years on average and often in 5 years.
Is this property trading or investing
The deals provided are generally aimed at Property Investing, where the intention is to Buy and Hold and ultimately generate a passive income from rent.
Property trading uses different criteria for property selection, is less about balancing income and expenditure but more about profits between buy price & sell price. A lot of Developments will have an element of trading (sell part to pay for the rest). Trading profits are also taxable income & you will be required to register for GST.
Don't try to mix the two, as the IRD will most likely class all transactions made by a Trader as taxable, regardless of whether the intention is to Buy & Hold or sell for a quick profit (its called tainting).
Whereas an investor who expects to ultimately make money from rent (which will most likely also be taxable) generated from an asset, may not be taxed on the capital gain from the sale of a property (it depends on the intention).
Be sure your financial advisor is clear what your intentions are, as it affects structures and tax liabilities.
Do I need a company to own investment property
A company is not required but can be more tax efficient.
An LAQC (Loss Attributing Qualifying Company) company in which the shareholders take on the responsibility of any company liabilities in exchange for being able to offset company losses against their income, can be a better way to structure investment property ownership.
Talk to your accountant / financial advisor, as the structure can make a big difference to who can offset what losses & therefore claim tax rebates.
What do I do if I make a FORTUNE with my Property
Firstly you say thankyou to us for making you rich by buying us a nice present like a Ferrari ! :) just kidding.
Then - You sit back and relax knowing that 10 years ago you made the BEST DECISION OF YOUR LIFE to purchase some Brand New Investment properties in high growth areas.
While you relax beside your pool in the sunshine you can reflect on the fact that you made more money in the last 10 years than you have at any other time in your life & you didn't have to work 60 hours a week to do it.
That you made more from your property investments than your salary and saved a considerable amount of tax that you would otherwise have had to pay.
That you made your own decision based on the FACTS, not on the doomsdayers gloomy predictions.
That you followed the advice of those doing it, not those on the sidelines with the theory books in their back pockets.
That you listened to your old advisors and noted their concerns, but also noted that most of them were just as poor as you were at the time.
That you listened to the recommended Professionals that were in the industry & that were making money themselves by doing exactly what you were about to get yourself involved with.
