One guide that all New Zealand investors should read

For years now one of the most sensible, reliable and accessible commentators on investing in NZ has been Mary Holm. She runs seminars, advises government agencies and working groups, writes a great column for the NZ Herald and is generally just New Zealand’s favourite financially savvy auntie.

New Zealanders are not always the best with financial literacy. We are often more scared than we should be of the sharemarket, we are famously not scared enough of piling ridiculous share of our wealth into investment property. We naively invested huge sums into dodgy finance companies and then the government had to bail us out to the tune of more than $1Bn!  We don’t tend to teach financial literacy at schools, except a few courses run mostly by banks, and many of us learned only the basics (or perhaps just bad habits) from our parents.

Thankfully the Reserve Bank is here to save the day.  As part of their focus on financial education they commissioned Mary Holm to write a simple booklet to make the complicated topics of saving, investing, and risk simple for everyday New Zealanders. It’s my favourite kind of book, it’s only 60 pages long, has small pages and has lots of pictures, tables and graphs to explain stuff.

Its available FREE to everybody on the interwebz right here on the RBNZ site:

https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Factsheets%20and%20Guides/guide-upside-downside-a-guide-to-risk-for-savers-and-investors.pdf

Or, if you prefer the crisp feel of a page beneath your fingers. I have limited edition paper copy of the book that I can send out to one lucky winner. Just comment below with your saving and investing questions and I’ll randomly select one lucky winner to send the booklet to.

What’s not to love. A free book which was already free anyway.

Speculation vs Investment And How It Relates To Your Retirement

Most of us have had this colleague at least once or twice. The one that comes into work with a spring in their step (I can sense that you’re tensing up already) and over your coffee break chit chat regales you with how they’ve bought some shares or a piece of land.

The conversation usually goes something like,
‘Hey colleague, I’ve made this great decision in my life of buying this asset. I’d like to inform you that it’s been one of my best decisions, the value of it has already risen by $x! I knew it would do this because of various factors I’d taken into consideration before buying’

The inference being that they have some inside knowledge that others don’t or they really just want you to know that they’re a bit better off from last week than you are, without all that gosh darned work everyone else is putting in.

I can tell you this story in this way because I was this person for a few months and I’ve heard it from others a couple of times too.

I was 21 and was working in what essentially amounted to an insurance sales boiler room. Our customers bought reasonable insurances like car or home insurance, and we’d then thank them for their business by harassing them with multiple phone calls to buy worthless insurances that never paid out, with very high premiums compared to most and being encouraged to guilt them by asking ‘Do you have a plan for your family if ‘x’ happened to you or them?’. Not a nice job.

I decided I’d start using Plus500 on the side, an online share buying platform that uses leverage. This was my way to get into learning about shares with an eye to day trading. This was around 2011/2012 at the start of the Greek Debt Crisis.

Because I was clever and I’d watched the news, or so I told my colleagues, I’d mainly gone short on Greek shares (sold the shares before buying them, essentially I’d make money if they went down in value). I’d put in 500 of the Queen’s finest pounds and grown it to over £1000 within a few weeks. I justified this with a few of my own political biases and historical takes on the situation. I’m sure they hated me, I would have.

I continued to hold onto these shorted Greek shares and they continued to fluctuate. The news was telling the world that Greece will default at any moment and everything within it’s borders will be worthless.

Now you’re probably thinking that I’m going to tell you that it all turned to custard and I lost it all. Well, no. I cashed out at £750 – £250 profit in all.

So why would I tell you this? Well, the truth in this isn’t whether a profit or loss was made but what was learned.

The key point was that the news, and therefore my reality as far as Greece was concerned, had very little correlation to what the share price was now doing. The shares were rising in value, the opposite of my prediction, wiping out some of the gains I had made in that time. I’m sure someone can fill me in on why that happened but even then, it’s 20/20 hindsight at best.

Why didn’t I cash out at £1000? If I crystallised my gains by selling, what could I invest in next? How could I possibly know if I was buying in a peak or a trough and how quickly that might change?
The answer to all these was that I didn’t know, and if I did, I wouldn’t be working in a poxy call centre.

The only thing I learned about day trading was that I had absolutely no control over the result. Perhaps other more knowledgeable people do but little Andy here, whose credentials didn’t extend much further than filling in a Plus500 sign up form and debit card details certainly didn’t. Realistically, in this manner, what was the difference between picking a share and picking a horse? I decided to quit at £750 before one of my colleagues asked me how things were going and I’d no doubt have to sheepishly tell them I’d made a loss. This way I made a profit and didn’t lose face.

I’m certainly not saying don’t buy shares and I’m not saying don’t buy land (I might say don’t buy horses!), what I will suggest is don’t buy them like this, where you essentially guess off a hunch and make up your reasons to justify your decision after the fact.

Whilst I thought I was investing, simply because I was putting money into an asset with the intent of making a profit, I was really speculating. These terms are used relatively interchangeably colloquially but there are definite differences.


Which brings me to the overarching point.

What’s the difference between a speculation and investment? In terms of how we can separate the two in a practical sense, it’s about where you intend to draw the projected income from.

Investment – Your profit is primarily drawn from the income the asset produces. This can be in the form of rent or dividends.

Example: You buy a share in Acme Company for $100. It pays a 10% dividend which is the best return on your dollar you feel you can achieve.

Speculation – Your profit is primarily drawn from the increase in the asset’s value.

Example: Based on your astute observations, Silver is at a bargain price and you feel it’s got to go up in value. You buy at $100/oz and plan to sell once it hits $120/oz

It’s not to say that any single type of purchase, whether it be shares or property, is either a speculation or an investment exclusively. The same category of purchase can be either.

Example:

A house is bought for $500k. The purchaser buys as they expect local house prices will rise due to new transport links with the city centre, the intention is to sell once it hits $750k in value. The rent collected is secondary. This is speculation.

Another house is bought by a different purchaser. It provides an 8% return in rent, whilst the holding costs only run at 5%. The purchaser buys as they want to to use the 3% difference to supplement their regular income. The potential rise in capital value is secondary. This is investment.

Both have bought a house. Both have bought with the intention of drawing a profit but the methods of drawing that profit are entirely different.

That’s also not to say that investments can’t rise in value and be sold off at large capital gain. They can and do, but it wasn’t the primary intention of the buyer.

With speculative instruments, when you sell, you realise the loss or gain. This is your profit and you must continue to speculate with new purchases to continue to draw an income in this manner.

The risk is higher with speculation as you’re drawing your profit from an unknown variable, namely which way the price will go and by how much. If people knew where the price was going, it would already be at that price. The rewards can be massive but equally the losses can be devastating.

Even the best of us can only guess the outcome correctly a small percentage of the time which is why investments make more sense for the early retiree as the bulk of their retirement plan. Sure, you’re less likely to have that one off win where you make bank for life with little to no effort, but you’re also less likely to lose or go bankrupt if your investments are wisely chosen.

With investments, the owner draws an income from the asset for as long as they own the asset. The owner knows approximately what the income will be from the asset from day one. Investments are therefore more ideal for a steady income and an early retirement.

The risk is mitigated with an investment because if the price does drop, the owner can continue to hold on and ride out a market downturn without any cost to holding the asset as the income will likely continue to cover holding costs.

Neither investments nor speculations are inherently good or bad, and the advice here is neither prescriptive nor proscriptive. Both are necessary functions of markets and hey, a little speculation here and there can be fun, but being able to distinguish and understand the risks is really important to your early retirement and financial security.

The advice is to not bet the farm on speculation and choose strong, steady investments for the bulk of your portfolio.

How to Set Property Investment Goals

Property investment can appear to be a minefield, with investors either making huge windfalls or crashing and burning… depending on what you read in the news.

Ignore the news because in reality successful investment is methodical and almost boring. Good investors devise a repeatable, controllable process and rarely deviate from it. They have clearly defined what they are working towards and stick to the path.

Many successful investors, even if they don’t know it, use S.M.A.R.T goals, which means their goals are:

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Time bound

What is a S.M.A.R.T goal? Lets illustrate that with an example of what it isn’t.

“I want to be able to give up working someday”…. ummm, this matches none of our criteria for a S.M.A.R.T goal! How do you measure “someday”.

“I want to be able to retire at 55″…. OK, we have a deadline but not much else to go on.

“I want to have $50,000 in passive income to retire on by the time I turn 55″…. Getting better, we have a specific goal and a deadline. The goal is also measurable, so 3/5. But if you spend $60,000 per year you still can’t retire (unless you plan to cut your spending, hint hint!) and what if you are 54 years old and have no passive income – the goal may not be achievable.

“I want to invest in property to build up a passive income of $50,000 per year over the next 20 years, by which time I will be mortgage free in my own home and able to retire on that amount.” Boom, $50,000 is specific and measurable, it is probably achievable to do this over 20 years due to the miracle of cumulative gains, we have a deadline and we know we will be able to retire on that amount.

Why is it important to distill your goals? It does two key things for you

  1. You gain clarity on what actions to take to move towards your goal
  2. You gain peace of mind from ignoring distractions that would deviate you from your chosen path

When somebody asks me how to property my first response is to ask why they want to do so, what I’m really looking to see is how clear and S.M.A.R.T are their investing goals. Once those are clear in your mind the “what”, “how”, “where” and “when” components of property investment are far easier to work out.

Why You’ll Never See A Downturn Coming And How To Grow From It

The year was 2015. Yeah, not that long ago really but it sticks in my memory as a tough year.

Things had been going pretty well for me financially up until this point. I’d hit 25 years old and managed to garner 4 rental properties all providing nice returns on investment by the room.

The Christchurch rooms market was steady, a single room went for a minimum of $160pw and a double for $220. I had one house that now became a 6 bedroom, due to the addition of a sleepout in the garden that was returning $1080pw. This was from a properties that cost about $250k, so as you can imagine I was pretty happy.

Christchurch was riding the coat tails of the earthquake. As much as it brought great difficulties and undoubtedly did a great deal of hurt to a lot of people, there was undoubtedly a temporary economic boost to the area.

My rooms were mostly rented to international EQC workers. They weren’t looking for somewhere to settle down for a lifetime, just somewhere to rest their heads for a few months whilst working. Somewhere that didn’t cost them the earth as even my high rental rates were a little below the norm.
With having a number of people in a house, wear and tear starts to accumulate. Chips out of paintwork, the garden gets overgrown, the house gets untidy but you know, at the time, it didn’t feel like a big deal.
I knew I could put up an advert on Trademe (those were the days, I’ve not used Trademe for renting out rooms for years now!) and my phone would ring off the hook for half a day until the room was full.

‘Why should I improve things?’ I thought. ‘These places are shooting up in value, the tenants will only break stuff anyway and the rooms get rented out in no time.’

So, it went on and by this stage, the houses were all getting pretty shabby. I hadn’t put much aside for them because with such strong cashflow, I could always rely on just taking any maintenance out of that, right?

Then May hit. It was cold and unforgiving in every sense.

The first signal something was wrong came early on but it sounded just like the normal ebbs and flows of the year. There was a mass exodus and roughly 6 rooms emptied out within 2 weeks. This might sound drastic but really, it’s not that unheard of in my end of the market as travellers don’t like winter so much. They move on to the next place with a job and a bit of sunshine.

Now I put up the ads, I did put up some pictures I’d taken on my phone, which I hadn’t before.

There were no calls.

I checked the ad, made sure I hadn’t mistakenly put my phone number down wrong. Nope, all correct.

Then a couple of days passed. Nervously, I decided to drop the price by $10pw. There were a couple of texts but I didn’t get any replies when I responded to them.

Then another $10pw off. The cost of having these rooms empty, maybe $200pw greatly outweighed a measly $10pw in lost potential income.

A few calls and a couple of viewings. People came over to look, they were the exact sort of person that only a month before would have jumped at the chance to rent a room at these prices. What was happening?

The air in which they viewed was entirely different. Before, the choice was in my hands, it was a complete sellers market and everyone knew it. They used to talk to me on a level, I’d learn a little about them as a person, what they did, what they’re wanting to do in Christchurch and maybe share a joke or two and we’d come to an agreement.
Now there was no eye contact, just a quick scan around and a short ‘thankyou’ and ‘I’ll let you know’. It felt alien. ‘I’ve just got a few more places I’d like to look around’ became the new catch phrase.
When asked, the house viewers simply said that it’s nice but not what they’re looking for. ‘Was it the price?’ ‘Was it the location?’, usually met by replies of ‘No, no it’s fine, just not for me.’

In business, people don’t usually tell you what’s wrong verbally, they only say through their wallets. They’re nice people and they don’t want to be the ones to hurt your feelings.

I dropped my deposit amount from 3 weeks rent to 2 weeks. I had a little more luck, I managed to fill a room or two but not in an ideal way, short termers that didn’t quite fit my ‘ideal tenant’ shortlist.

The rents came down another $10pw and there were enquiries but still few takers.

I removed a sleepout as some of the feedback suggested that people were no longer willing to live with 7 other people in a house, and what was once commonplace was now unheard of.

Then an entire house full of Irish guys decided to move into another house together, including taking the guy that had just moved in a few days prior. I’d really worked hard to get him in too!

This all happened within a few weeks. The speed was overwhelming. I had to do something fast as I was hemorrhaging cash.

Don’t get me wrong, I knew on some level that this EQC boom wouldn’t last forever but I always thought I’d see it before it hit and be able to make adjustments. The oft vaunted ‘soft landing’ (Clue: There’s no such thing, booms and busts are inexorably linked). In a lot of ways, this is borne out in the housing markets up north at the present and explains why bubbles happen. We all think we’re smarter than the other guy but we can’t all be right. The only truths we can accept is that we are all naive and that no one really knows anything.

By this time I was getting exhausted and frustrated. Rooms empty everywhere and the rooms that were full were at ‘discounted’ rates.
I sat in the car explaining my thoughts to my girlfriend. Possibly more like whinging and whining. She’s a fantastically patient girl and equally knows how to get me to do things and we agreed that I’d show her around as though she were a potential tenant and go from there. I was a bit nervous as, honestly, I was a bit fragile by this point. Constant rejection in the face of your best efforts can do that.

We opened the front door of the first place. Her review was blistering to me.

‘There’s hand prints up the walls, this furniture needs replacing, the shower curtain needs replacing, the bedding’s not up to scratch, the garden’s a nightmare, the TV remote doesn’t work, there’s no lady bin in the toilet, the walls need repainting………’

It went on. It was harsh and painful but it was exactly what I needed and we both knew it. I wasn’t emotional or silly enough to not take her advice. We spent weeks replacing nearly every article in the houses, cleaning, gardening, painting and making repairs. The most painful thing is having to spend thousands you’ve only just got when you’re losing money as it is. At times it was a juggling act with paying bills and doing the necessary work. I wasn’t really sure whether it was terminal and wouldn’t pay off.

Rents eventually settled at around $150 for a single and $190 for a double so pretty steady. Rooms filled up again. It’s never got back to those heady EQC days and a part of me wouldn’t want it to. I became complacent and weak as a result. I let hubris and laziness take over my business.

Over the last 2 years it’s been a process of constant improvement. We’ve started our website. I’ve learned a bit of amateur photography and my girlfriend helps me stage the rooms as I tend to get a little too practical. The houses have been repainted inside and out. The process is still ongoing, I’ve got bathrooms to replace and various other projects. Marketing has moved to Facebook, rather than Trademe and we’ve changed pretty much every supplier of anything. My personal spending has gone through the floor and frankly, I’m still in ‘survival mode’ this long after, I sometimes fret I haven’t done enough and will end up like this again. Rents have edged upwards ever so slightly. I managed to negotiate my interest rates down by around 1% on average which was an unexpected boon that really saved my arse.

My message is, if any of this sounds familiar, if you’re too comfortable, too complacent and not keeping a decent cash buffer and constantly improving your portfolio, you may be at risk. If you think it’ll never happen to you and you’re too smart and you’ll see it coming long before it hits or that rents only go up and interest rates only go down, you are most definitely at risk. I’m lucky and had great people around me and got a second chance, others might not be. Had interest rates gone the other way, although I would have likely survived, it would have been a far far more painful affair.

My thoughts as I was writing my last blog post on property was that it sounded too mechanical. It’s easy not to include the trials and tribulations, the self defeating psychology we all have and our own fallibility but realistically it’s the truth. The more we share the bad as well as the good, the more we can hopefully help others avoid it.

Are you overinsured? Ask yourself this one, simple question

As a species, we’re pretty good at surviving. Pat on the back for all of us!

As part of this, we’ve developed millennia of ingrained primal habits and conditions in an attempt to avoid all the hazards life throws at us.
Fortunately, it’s done us pretty well so far. Unfortunately, it’s not a system designed for the 21st century first world, where you’re never likely to run out of food but you might foreseeably prang your motor or lose your passport in a foreign land.

Nothing life threatening but it’s all the same response.

n.b. I’m not including the U.S. due to it’s differing views on healthcare. Your life might be at risk here, luckily there’s plenty of U.S. blogs you can search through for more info on this.

Our latest attempt at group safety, conjured by Lloyds of London just over 300 years ago, is insurance. On the whole it functioned quite well in the beginning.

The premise was, prior to insurance, if you sent out your ship (unfortunately at these times, it was usually involved in the slave trade) and this ship then was lost, you would lose your entire investment. This is a big risk to take.
However, if there’s 100 ships and the odds are that only 2 will be lost per journey, by spreading the risk amongst all the ship owners, with a margin on top for the insurer, no one would ever lose everything and the insurers made out too. What’s not to like?

I’d imagine this was quite a logical affair originally. Edward Lloyd opened his coffee house, shared all the recent shipping information with those with vested interests and saw an opening. But even he, the inventor of insurance as we know it, when it was in it’s infancy, saw that it could be bought as an emotional response.

Whenever news of a ships loss came into the establishment, he would ring a bell, reminding everyone in there that it could be their ship next, and if they don’t keep paying up for insurance, they could be out on the street and broke within no time. Whist the premise definitely made sense, this one simple act made every loss tangible and instilled fear into all that heard it.

Emotions are wonderful things for marketers, easily tugged at, and once you’re in a state of fear, you can be sold anything. It’s often subtle but you hear it played out in peoples everyday reasoning.
‘You must buy a large 4×4, otherwise if you have an accident, your children could die.’
‘You must have an expensive alarm system with 24 hour, pay by the month monitoring because there’s bad people around every corner that want to hurt your family – for reasons unspecified. ‘

You know the ones.

And the thing is, the human brain is notoriously bad at assessing risk. On this page, they use Thaler’s experiments on risk as an example

‘Peter Bernstein cites an experiment by Richard Thaler in which student were told to assume they had just won $30 and were offered a coin-flip upon which they would win or lose $9. Seventy percent of the students opted for the coin-flip. When other students were offered $30 for certain versus a coin-flip in which they got either $21 or $39 a much smaller proportion, 43%, opted for the coin-flip.’

So both scenarios were identical, simply framed differently. However when presented as a potential loss, the human brain runs away to it’s safe, known quantities as fast as possible. This is why it’s so easy for insurers to take us on a ride. We cannot handle loss.

All we need to do is remain rational and we can reap the rewards others run away from.

Right, so how do we remain rational, with respect to insurance?

You ask yourself one simple easy question.

‘If I didn’t have this insurance, would there be any chance, however remote, that I, or my loved ones, could be sent bankrupt as a result?’

When presented in this logical sense, no insurer can start whining at you to ‘Think of your children’ or ‘Do you have a plan in place if you did lose 2 legs an arm and an eye?’. You don’t need a degree in statistics or to become a qualified actuary and it works in 100% of situations I’ve come across.

This is the point of insurance, not to save you from ever having responsibility for your problems in life as some use it. As much as we’d all like to, none of us will ever get away from those.

So let’s run it as an experiment –

Car insurance

Do you go Uninsured, Third party, Third party fire & theft or Fully Comprehensive? I suspect most people go fully comprehensive but is it the best choice?

Now by asking the simple question above, we can work out that you more than likely won’t be made bankrupt by losing your car, whether through an accident, a fire or a theft. If it might send you bankrupt, perhaps you’ve bought too much car for your income and asset levels and need to revisit.

However, with no insurance if we were to have an accident, we could cause ourselves to lose millions in damage claims and court cases so clearly this isn’t the correct option either. Logically, the best and most efficient option is Third Party.

By doing this, you’ll save yourself in the region of $500 per year.

Home insurance

Here the options are uninsured, insured with a low excess, insured with a high excess.

Uninsured makes no sense in this option as the loss of a property will send the vast majority of us into bankruptcy pretty quickly.

So we need insurance, now lets look at the excesses. Low excesses of $500 or a high excess of $5000. Bear in mind, you’ll only be using this insurance in the event of a total loss or major damage and the insurance company don’t charge you $5000 to come assess, they simply take it off your payout.

Would it really make that much difference to you if you were only paid out $95k instead of $100k? You couldn’t find a way of saving that on the repair somewhere?

So if you can afford $5k to come off, it’s the high excess, if not, it’s the low excess.

You’ll save around another $500 a year going for the low excess.

Life insurance

Would your partner be comfortable, financially speaking, if you passed away tomorrow with no insurance? Or would they have to work 3 jobs, sell off the family home whilst raising 3 kids to stave off bankruptcy? More potential situations here but the same principle applies, could it send your loved ones bankrupt? If yes, get it – and just enough to be comfortable. If no, whats the point?

Guess how much you could save here? Yeah, about $500 per year.

Junk insurance

Mobile phone insurance, extended warranties, insurance for sending a parcel, personal accident cover (I used to sell it, it’s awful), all the extra insurances they tack on to your home and car insurance. By this point in the post, I’m hoping these should all sound like thoroughly unworthy candidates for your hard earned.

—-

You know what the best thing about keeping your insurance levels under control is? Not many opt for these levels of cover, other than misers and scrimpers like you and me, therefore they’re extremely competitively priced! They’re sold more with an eye to logic than emotion and are easily comparable against other companies policies.

That’s not to say you won’t lose sometimes. This year I’ve lost 2 windscreens, one through my own fault, loading in timber, one through a guy throwing a bottle at my car. It’s cost me $550 but it’s an aberration. Statistically, you only lose a windscreen every 12 years so hopefully, I’ve got 24 years left with no windscreen losses! Every year from now on, I’ll still be saving $500 per year.

Keep it out of the insurers pockets and send it to your superlife instead.

How to insulate your ceiling space for under $150

Well, since I’ve had more spare time of late to make repairs to my portfolio, I’ve concocted various schemes to save a dollar here and there, some have worked really well, some not so well. I’m one of those people who can’t help but brag about getting a fab deal on something, so sit back and let me regale you. Let’s start with…..

Ceiling Insulation

Standard price = ~$1200-1500 supplied and fitted on a 100sqm house
Our price = $0 – 150 Per 100sqm house

Much ado has been made about this recently. All these awful landlords supplying these mouldy damp rentals. It’s a bit overblown in my opinion but realistically, you should be doing everything in your power as a landlord to make your tenants stay as enjoyable as possible. It pays you back in terms of not having the Tenancy Tribunal on your back come 2019 when ceiling and underfloor insulation become necessary, less damp and higher tenant retention and happiness.

The grants and insulation schemes work out to be something of a rort. What anyone can get from a normal quote or two with no discount and getting fitted, works out the same as if I get a government approved installer to do it with a 30% discount. They know they’ve got a reasonable demand, accelerated by the onset of the 2019 regulations. Even when people see the two prices are the same, the one with a discount feels more attractive, even if you know it’s a fake discount.

So you’ll need some basic equipment. You find that you end up reusing stuff again and again on different jobs so don’t fret about buying something of decent quality.

For this, you’ll need

  • Thick gloves – These $4.86 Mitre 10 gloves work great, the thicker the better
  • Respirator – $80 This one is a goodie. I’d recommend against the paper ones, they don’t work as well and they’re about as durable as toilet paper. You’ll reuse this on many future projects and they’ll save your lungs. Insulation fibres in your airways aren’t fun, believe me. You can get paper ones for $3 or so for 5 but don’t say I didn’t warn you.
  • Safety Goggles – Your eyes will burn without them, it’s nasty stuff insulation.
  • Overalls – $6 Disposable ones are better here, you won’t want to rewear overalls that have been used for insulation, you’ll itch if the overalls come directly in contact with your skin.
  • Light sources – Likely your loft doesn’t have it’s own lighting system. I’ve found a central work light along with some handheld LED’s work really well. If you can stretch to an LED central light, it gives off much less heat which you’ll be grateful for when you start working.
  • Craft knife and lots of spare blades

And a radio to keep you company. Don’t attempt this without the safety equipment here as a minimum.

So insulation comes by the roll when new and it’s insular qualities are rated by R value between 2.6 and 5.2 for ceiling insulation. Most installers use R3.6 and that is what we will most likely be using as a result. Incidentally, the higher the R value, the lower the square metreage covered per roll. R3.6 is good enough for most applications in NZ and at the price we’ll get it at is a fantastic return on investment.

The advantage of buying it new is that it’s easier to install and much less itchy. Not quite enough to warrant the extra $1000 in my opinion. Some say it stays in place better but I think that depends on how well you install the offcuts.

We’re going to use what the installers cut off when they put it in a house. The installers have no use for it other than dumping it so you’re not only doing them a favour but also the environment, doubly so as the inhabitants will use less power to heat the house up.

The best way to source it, go to trademe and search for ‘insulation offcuts’. I picked it up from this company, called them up and they saved a weeks offcuts for me for $200. It took 4 full trailer and car loads but so far it’s done 4 houses, 1 loft conversion, 1 dog kennel and I’ve still got about 10 bags left.

I’ve seen it in Auckland for free and even if it’s not advertised on Trademe in your area, call up your local installers and ask if they can help you out. Try to go for Earthwool or Greenstuf, the old Pink Batts are horrible to work with.

Once you’ve got it back, get on all your safety gear, set your lights up and get in the loft. Don’t step on anything that’s not a joist or you’ll have one leg sticking out of your kitchen ceiling.

Now, if you’re making a $1000+ saving, there’s undoubtedly a trade off. This one’s hard work, sweaty, itchy and cramped but ultimately financially rewarding and that’s what we’re all about here. It should take about 3 or 4 hours, or to put it another way, $250-333+ph tax free in savings Tax free as insulation is classed as an improvement and therefore is a capital expense and not deductible.

You’ve got to fit these offcuts in like Tetris pieces. They come out of the bag in random quadrilateral shapes, you soon work it out. Pack them in snugly, without gaps but not so tight that it’ll pop up if they expand.

Now do that for 4 hours or so and you’re done!

If you’re a bit like me though and you can’t stand the itchy, dark, crampedness of it all, you can always grab a willing worker from your local Facebook page that might want to do it. You don’t need anyone with experience, just a physically fit person with a high tolerance. 4-6 hours work doesn’t cost you much. It’s still an $900+ saving.

Note that if you tried to do this for underfloor, you’d have a nightmare of a time trying to get it to stay in place in defiance of gravity. In this instance I haven’t found a shortcut, if anyone knows one, I’m all ears.

Have fun!

The 3 simple steps to building a strong property portfolio in NZ

So, you’ve probably read the NZ Herald and Stuff articles on property. The classic story of an ‘investor’ goes something like this

‘Mr. x has bought this property and then sold it on a week later for $200,000 more!!!’

Well, it’s sensational, jealousy inducing, it grabs eyeballs and yes, it makes us all salivate just a little bit. So how do you find a property like this?

The answer – you don’t.

Much like everything on the news and TV, it’s a facade and a rather thin one at that. Not to say each individual instance isn’t true but the idea that every investor goes out and buys something and just flicks it on for huge gain simply isn’t true. That sort of speculation (and it is speculation, not investment – see this lovely chart if you’re not sure on the difference) is fraught with risk. That’s also not to say that no one makes a living out of it, some do, but equally some people make a living out of poker or craps and you certainly wont find many competent investors in those areas.  The issue is that you’re only hearing about the winners, not the losers. Survivorship bias for those into their psychology.

So if you’re a bit more like me, a bit more thoughtful in your investments, you like making a good income and growing your capital but not risking everything you’ve got and being able to PLAN for your retirement, not simply hope. If this sounds good then I might have something for you.

Some people have preconceived ideas about property relating to how to make money. So I’d like to kindly ask you to drop those and in it’s place I will use the metaphor of the box. Thanks for that. What we are investing in now is a box, a bland plain box that’s only purpose is to make money for you. A box you need to watch, nurture and take care of.

There’s many ways to skin a cat and our boxes are no different, I’ll guide you through the principles only and we can look at the more interesting techniques and ideas in future.

Let’s say we see a box for sale. This box is $100. Is this a good price? Is it a good investment? How do we know with some back of the envelope calculations whether it makes sense?

Test 1 – Cashflow

You’re going to rent out this box to someone.

Cashflow is an oft misused term so lets define it here. The amount of profit or loss you make over a given time, simple. We will use the annual amount.

Positive Cashflow – Profit and good times
Neutral Cashflow – You might have to try not to fall asleep in your investment. You’re not losing anything but you’re not really gaining anything either.
Negative Cashflow – You’re making a loss. You’re paying for someone else to borrow your box. Why?

If we borrow the whole $100 (always calculate the full amount, any investment can be shoehorned into looking good with a large deposit), the bank says this will cost us $5 per year in interest.

Our other costs (box insurance, box maintenance, box management etc) come to $2 per year.

We find out from local box rental companies that they can rent this box out for $10 per year.

So $10 – $5 – $2 = $3 profit.

Fantastic, it’s passed test 1, it’s profitable on a cashflow basis. This is extremely important to the stability of your investment. You never know what’s around the corner, borrowing costs can rise, rents can drop, your tenants could leave and you might not be able to fill it, you could lose your job and so much more. A profit means this place holds it’s own and pays for itself.

If it’s zero or less, find a new box and try again.

Test 2 – Capital Value

So to borrow on your first box you’ll need a 20% deposit.

n.b. I’m going to use 20% deposit as the current 40% LVR restrictions are temporary and will likely be repealed once the excrement hits the fan which is also likely to be when you’ll get the best deals. It can also be done now through non-bank lenders and other means. Come to your own conclusions but I feel this explains the principals better, especially with confusion between owner occupied, rentals, holiday homes, eurgh. 20% ok? ok.

Let’s say you’ve got $20 saved up for your first box. Well done you! You could afford this box and be making a tidy $3 per year. A great investment, yes?

Well it’s a good investment but it might not necessarily be a great investment. It depends on how much other peoples boxes are worth.

The local box sales suggest boxes similar to the ones you’re looking at buying are worth $110. With some cosmetic repairs, a better example might go for $125.

If you were to buy this box today, you would have an extra $10. What’s not to like? If you sell it tomorrow you’ve already made a profit (not that we’re going to sell).

This is a great investment. It has both Cashflow and Capital requirements sorted. Not to say there’s no risks but you’ve greatly reduced any potential pitfalls in future.

If there’s no ‘meat’ on it, negotiate the price lower or move on to the next one.

Test 3 – Preparing to buy more boxes

How would you buy your second box? Well you’d have to scrimp and save and get another $20 or so together.
There’s another way. If the bank gets a valuation for your box at $125 and the debt on box 1 is $80, then that’s your $20 deposit sorted for your next box. Crazy? Probably. Legal? Yes. Useful? Definitely. Let me explain.

So you buy the box, get your paint rollers out and make some repairs and get it professionally revalued at $125. You knew it would revalue around this amount because the valuer told you it should and your own comparisons with other boxes suggested they were correct.

Box 1 Value – $125
Debt on Box – $80

Your want to buy another one of these boxes and make another $3 per year. It’s logical, why not?

It looks like this – (125 x 0.8) – 80 = 20

Box Value – $125
Now take off 20% – (or x 0.8). This is taking off the deposit amount that you must keep in the property until you sell it. = $100 remaining
Now Take off the remaining debt – Remaining debt is $80, therefore $100 – 80 = $20.

$20 is the remaining value and the deposit on your next box. Honestly, I’m not making this up. Done right, you’ll only ever need to raise capital once to enter the this market. The rest remains on either good luck (values rising) or your ability to create capital value through improvements or otherwise.

Your ability to continue in your investment journey depends on how well you bought the last one.

Rinse and repeat, in no time you will have a strong cashflow income and a portfolio that is likely to grow well over time.

Replace the work ‘box’ with ‘property’ and add a few zeroes to the dollar amounts and you’ve got the basics of property investment. Well done.

Also note that we don’t rely on chance. The numbers we procure are all from reliable, qualified sources. Government websites, Definite sales figures, experienced estate agents with no conflicts of interest, not the one trying to sell you the box. No salesmen.

If the property goes down in value then guess what, it sucks – but here’s the key part – you’re still making a cashflow profit every week. How long can you keep that going? As long as you need to. If it was cashflow negative, you’d be forced to struggle, sell or to realise your loss.

If the property goes up in value, which isn’t guaranteed, then it’s a bonus and should be treated as such. It’s not because you’re a whizz kid investor and you know everything (yeah, that was me a few years back, sorry everyone), it’s because of good luck, things like government incentives to buy property, lower debt costs, higher wages or strong immigration. If you can control any of those things, then you can take credit for your fantastic knowledge and foresight, until then, it’s luck.

Be aware that this is using the principle of leverage, the bank multiplying your buying capacity by 5. This also increases your risk factor by roughly the same amount, there’s no such thing as a free lunch. If you win, you’ll win big, if you lose, you’ll lose bigger. Be careful and make your own judgement calls, these strategies are designed to ameliorate any risks, not remove them entirely.

Here’s some great places to find out different things

  • Property values – https://www.trademe.co.nz/property/insights
    Be honest and compare what you own or what you’re looking at owning against recent sales or similar properties. Similar being the key, a 4 bed 1900’s villa does not compare to a 4 bed luxury new build, even if it’s in the same neighbourhood. A fantastic tool and completely free
  • Potential rents – https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/
    Simply input your area and you’ll know exactly how much your property will rent for. Be careful that there enough bonds lodged for your type of property, anything with a low number of bonds held can be statistically off.
  • Mortgage rates – The advertised (carded) rate is for suckers. Find out what people are really getting at property talk. Again, be aware that some will get better deals for having large amounts of debt with a bank, some will have long standing histories and some might be telling porky pies.
  • Insurance – Try getting quotes from various providers
  • Management costs – Usually around 6-8% of the rental intake
  • Repair costs – if you’re not keen on doing them yourself, use the 3 quotes system. Get 3 quotes for what you need, go with the best one
  • The library – One of the best sources for information on how to start, read every property book you can get your hands on