APIA Blog

 

APIA: So, having been in the property market for well over a decade, what has been the overall purpose that drives your property endeavours?

J&J: We had a very clear aim which was to bring in enough money to live off with minimal time spent working and with plenty of freedom to do what we choose to do. The reality was somewhat different at first as we worked incredibly long hours wallowing in the mud, dirt and plaster dust for what seemed like forever, until just when we started to question whether this crazy way of life was for us, it all started to come together.

We were complete amateurs but we did learn by experience and it's important to remember that trading or investing is like starting a new job which you have not done before. No one is great at their job on the first day, it all takes time and practice. Naturally as time goes by you get better at it and more skilled until you become something of an expert and surprise yourself. Of course to take the plunge and buy property means risking huge amounts of money so it can be very daunting but it is only by starting the 'job' of investing that you start to become skilled by your experience of doing it.

The most important and key thing for us was having a clear goal - to reach financial freedom whereby we had enough to live off and didn't have to work if we didn't want to. Whatever your goal is, writing it down, knowing what it is and holding it in mind each day is the most powerful thing you can do to achieve it. By doing this we set our path and despite many mistakes we reached it and attracted the right properties to us as we went along.

 

APIA: How has your strategy evolved over the years?

J&J: At first we were excited just to make about $100k a year doing a few trades but we did a lot of the work ourselves and it was hard and stressful work. Then in 2008 we were hit by the recession. We simply did not realise that house prices could go down and we had started a small subdivision at that time. By the time it was ready to sell the houses we expected to sell in the high $300ks were now only worth low $300ks. We had to sell at a loss as the interest rates were over 10% and so it was just not an option to rent out the house. This was a terrifying time and put us back to square one, luckily we managed to keep our home, but that was all. From 2009 onwards, although a slow market, there were enough buyers around to make trading possible so we were able to make good profits and get back on track. This setback made us very determined to create security for ourselves so we would be safe in the future. We realised just how risky trading can be and also that we didn't want to be reliant on this as an income for ever more. That's when we considered buy and holds as a viable strategy. We had discounted rental property as it didn't look to give very much of an income to make it worthwhile in terms of short term wealth. But we could see that if we could create rentals at 10% returns and get enough of them, we could get a reasonable passive income out of it. We set about doing this by buying very well, renovating, creating more bedrooms etc, usually with 2 houses on one site or minor dwellings and all at around 10% returns. At that time having witnessed the very high interest rates we didn't feel that accepting a return lower than 10% would be wise. The last step in our change of strategy was to decide to aim for higher trading profits and use those to pay down the rental mortgages. We realised that our properties which had 2 houses on one site, if paid off completely, would each generate between $30 - $40k income after expenses per year. We wouldn't need too many of these to have good earnings. We stretched our sense of belief in what we could earn by dreaming big and not allowing doubt or disbelief whether it was possible or not to get in the way which was a crucial practice to make the larger profits a reality. We moved into small subdivisions which turned out to bring in more than 3 x what we had previously earned in a whole year in one project in some cases. By doing more of these we paid down the rental debt steadily and paid off our home mortgage.

I would recommend investors check out all the books available particularly Graeme Fowler's book. He also has a very helpful Facebook page - Property Investors Chat Group NZ, where he and other very successful investors give a lot of their time freely in answering questions with excellent advice, something highly valuable in the current climate of paid mentors.

 

APIA: What would you say is the main influencer of your strategy?

J&J: We always start with a clear goal of what profit we want to make or what yield we want for a rental, we hold that in mind and seek it out until we find it, even when it seems impossible. You have to see quite a number of properties before you find the one that will work. We don't buy rentals in the current booming market but will consider buying more in the down time on the old advice of, if everyone is buying it's not the time to buy. The right time is when no one else is buying. We create good rentals by adding value and don't just rely on capital gains. We keep a very good eye on what property sells for in our area and will hold off buying trades if we feel a recession is coming.

 

APIA: Property trading often gets a bad reputation in the investor community, what do you see as the biggest misconception out there for property trading (or traders)?

J&J: Buy and hold investing is fantastic for long term wealth when done well. But to create wealth sooner than the longterm, having a high income is very helpful as you can put that money into the buy-and-hold mortgages and create not only a safer investment with lower LVR, but real financial freedom early, as we have done in our early 40s. A salaried job is unlikely to provide enough income to achieve this, but a business can provide unlimited income to put into the mortgages. Trading is just a business like any other and has fantastic potential. It's important to do it all by the book and many people don't realise just how much tax we pay on trades. Not just income tax but also another 15% GST on our profits as well. The common investors myth that you should never sell is not something we adhere to as it is a very limited approach if like us you wish to have a worthwhile amount of passive income at a fairly young age. Trading accelerates things to achieve this whilst buy and holds are limited in that respect. Sometimes people say to us that they love their job and wouldn't want to stop working which is awesome. In our case property has been probably the only way we could reach our dream of having the freedom to choose to work when we want to and not have to work when we don't.

 

APIA: Day-to-day, what would you say is the biggest difference between a trader and a buy-and-hold investor?

J&J: Trading is like contract work, full-on for a set time, then nothing. In the down time we look for new deals, keep up with prices and visualise our next goals, or go on holiday! The best thing is, once a trade is done, that's the end of it. You don't have to think about it again and are free to do anything you want, unlike a business like a retail shop for example where you have the ongoing responsibility. With buy and holds you do have the ongoing responsibility but once set up well the level of work is low and they keep paying you every year, unlike a trade, which is a once-only income stream. We have needed both trading and investing in order to achieve our goals. There is cross over between the two but also very different skills needed for each. For trading you need to learn to budget very well, be your own valuer in order to be clear what you can re-sell a property for and make a profit and constantly weigh up where to spend and where not to in order to maximise profit. Sometimes we have on-sold houses with no work at all as this would give the best profit if there was limited potential and in other cases a full renovation was needed to get the best return. For rentals, you don't need to present the property to the same standard but you need to be looking to the longterm in terms of what will need maintenance. There is less pressure on the budget as you don't need to sell and see a profit straight off but more responsibility in terms of people skills with tenants and all that goes along with that. Trading has given us excellent training in budgeting and no overspending and this has meant we apply the same approach to our rentals effectively.

 

APIA: How do you balance your activities between trading and investing?

J&J: As we didn't set out to be investors and weren't looking to have too much responsibility, our strategy has been to hold less rentals but pay them down as I mentioned. We have all our rentals in Whangaparaoa where we live and have now got them very well set up with long term tenants, yearly leases which renew each March - a good time of year for finding new tenants. By making them all renew at the same time, we can deal with them all at once just once a year, apart from any repairs which we can organise from anywhere. We prefer to manage them ourselves and build a relationship with tenants which, along with very thorough reference checks means we have not had any major issues and have had no vacancies at all in 5 years. Last year we had a lot of time off from trading and this year we have so far done one subdivision trade. We are looking to do some more of these on a part time basis over the next year with the aim of paying our rental mortgages off completely.

 

APIA: What are the benefits of trading and holding concurrently?

J&J: We have needed both to achieve our goals. They are very different jobs and we had a steep learning curve for each. Originally we didn't want to be landlords, with horror stories of gangs and P labs but now we enjoy the relationships with the tenants for the most part and it certainly isn't boring. With trading it is more exciting when chasing a deal and satisfying to see the end result with fantastic profits but higher stress levels and risk, whereas the rentals are steady earners.

 

APIA: There are many investors who invest to get out of the (9-5) rat-race only to get themselves into another rat-race of endlessly buying properties which seldom have any significant positive impact on their day-to-day lives.   You however have a very good balance between financial squirt and quality of life. I know you had spoken previously about being a paper millionaire vs an actual millionaire - can you elaborate on that?

J&J: Having seen prices go down and suffered through the recession it can be concerning to see highly leveraged new investors who are millionaires on paper in terms of their equity but are perhaps unaware that the values can change and interest rates can increase. Right now it is hard to even imagine that is possible but history shows the property cycle is full of surprises. In 2007 we sold a little unit in Red Beach for $315k as a trade. In 2009 we bought it back again for just $200k in same condition, in a mortgagee sale and have kept it as a rental (currently it would be worth around $500k). But for us the paper worth of our properties is of little consequence, what we look at is what our passive income is and if interest rates increased how much we would be earning then. Its worth looking objectively at your investing situation and considering different interest rate scenarios to make sure you are as safe as possible in all eventualities. It's only when you sell that you know the value of a property and it's good to be in a very safe position so you can choose when that is and not have to sell at a bad time.

 

APIA: Finally, what is your top tip for APIA members to get the most out of their APIA membership?

J&J: We were quite daunted by all the experienced investors when we started going to APIA and so we learnt mostly from our own experience. Had we asked more questions and spoken to more investors I'm sure it would have been very worthwhile so these days we are always happy to spend time mentoring newer investors to support them in gaining knowledge and support to reach their goals. We co-host the North Auckland drinks nights when we are not travelling, which is a lovely informal occasion to have a good chat. Investors are on the whole a wonderful and giving bunch and we welcome anyone to come up and ask any questions anytime.