I’m going to drop a bomb here that might just surprise you.

After 14 years in the real estate industry (5 years in software, 9 years in sales) I have learned that the secret to making money in real estate is….. to never sell.

That’s it. Never sell.

That might sound crazy coming from a guy who makes his income selling property but I have always promised myself that I would be up front and open with my beloved readers about our industry and this is a critical point that too few people really understand.

We have all sat round dinner tables with our parents, or people of their generation and listened to them talk about the first property they bought and how it cost them 17,000 pounds or some such ridiculous figure. We listen to them say things like “If only I still owned that place, it would be worth squillions now…”

According to the same older generation. Many years ago Ponsonby, Auckland used to be a complete dive and you couldn’t give properties away. Now you need $1 million just to buy an apartment.

In this recent article from Gavin Evans, he notes that the NZ median property sale price has gone from $265k in 2005, up to $495k in March this year. Almost double what it was 11 years ago.

One of my closest friends and a long time mentor also happens to be the most successful property investor I know. Real estate investment has given him financial freedom, opportunities to travel and a lifestyle most people simply never get to experience. He has repeatedly told me his only ‘real estate regrets’ are the properties he sold years ago, thinking it was a good idea at the time, that are now worth 10-15 times as much.

When clients invite me round to talk about the market, find out what their home might be worth and how they should approach selling, I often end up spending most of my time there trying to convince them to hold on to their property, to keep it as a rental when they go and buy another home.

Interest rates are so low now that even a typical 3 bedroom home in Newlands can usually cover it’s costs, depending on how large your mortgage is. A typical 100sqm first home might be worth $450k or more, but could rent for $450 per week (which is a pretty terrible 5.2% yield but possibly enough to cover expenses)

Lets say you own this type of home, you have a mortgage of $300k, but you want to move to somewhere like Aotea.

Option 1: You could sell now.

Sale price: $450,000

Costs:
– Commission ($17,000 approx)
– Marketing ($2,000 – includes builders report and LIM)
– Legal fees ($1,000)

= Net Result after costs: $430,000
– leaving you with $130,000 after you pay back your mortgage which will probably become your deposit on your next home.

Option 2: Keep your existing home as a rental

Rental income: $23,400 ($450 rent per week x 52 weeks)
– Mortgage (interest only): $12,750 (based on a $300k mortgage at 4.25% interest rate)
– Insurance: $1,000
– Repairs & Maintenance allowance: $3,000
– Rates: $2,500

= Net income after costs: $4,150 (or $80 per week, which should cover the principal portion of your loan)

Equity = $150k (Your net worth is already $20k higher than if you had sold)

Note: You can still ‘use’ this equity to help with your deposit on your next home. Remember – banks will lend you at least 80% across the two properties.

So, as you can see in the example above, the property should pay for itself. However it’s important to remember you will likely borrow more against this home because when you own 2 properties you want as much debt as possible to be registered against your investment property, not your own home. For more advice on this speak to a good accountant. I personally use Tony Weekes.

Note: Always remember the difference between good debt and bad debt. Good debt is debt you owe against investment property. Bad debt is debt you owe against your own home. For more on this, check out that old classic, Rich Dad Poor Dad, by Robert Kiyosaki. Good debt is covered by the rent you receive on an asset which is making you money (hopefully). Bad debt is a liability which can limit personal freedom (eg. you have to keep working to pay the mortgage).

Now, the best part is…

If the property goes up in value, say 10% over the next year, then suddenly your investment property is worth $495k.

Equity = $195K.

You just made $45k in one year without having to go to work (and your net worth is $65k higher than if you had sold). How ridiculously good is that?

Yes it is a bit more complicated than I am explaining here and yes it will probably mean you can’t afford quite as nice a home in Aotea (or wherever you are looking), and there is no guarantee property prices will go up, but what a difference it would make to your long term financial security if the above scenario plays out!

Are you interested in finding out if you can keep your existing home as a rental when you move?

Step 1: Get a registered valuation done on your current home (cost: $500 – 600). You might have a lot more equity than you currently think. I use Bill Sisk from Valuation Consultants NZ Ltd.

Step 2: Get a rental assessment done for your own home. (cost: free usually). Karen Ellis is my personal property manager.

Step 3: Speak to a mortgage broker (I highly recommend Jenny Cheevers) and ask this question:

“If I were to keep my current home, based on my valuation and rental assessment, how much will a bank lend us on a new property? What kind of home can we afford to buy with our current savings / equity?”

It can’t hurt to ask the question. What is the worst that could happen?

Till next time,

Andrew Duncan – Real Estate Blogger

 

Non Real Estate Ramblings…

Favourite article I have read this week: “The tail end” by Tim Urban. This article will scare the crap out of you and make you appreciate how little time we really have in this world. If you need some motivation to enjoy every day and cherish every moment you get with family and friends, then this is it.

Favourite podcast I have listened to: Hardcore History If you are contemplating a long drive somewhere or just want something to listen to while you do the dishes or walk the dog, I strongly recommend checking out this podcast, especially if you have any sort of general interest in history. Dan Carlin’s story-telling ability is spell binding.

Favourite movie I have watched: The Fault in Our Stars I will do pretty much anything to avoid watching a Rom-Com, and if you force me to sit through one I will probably be the annoying guy who does a big sigh during every cheesey moment. I’ve got to admit this one had the eyes welling up though, a seriously sad and beautiful film that will make you appreciate being alive.

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THOUGHT OF THE WEEK:

“Be an encourager. The world has plenty of critics already” – anon

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