Solutions to LVR rules and understanding TRUE VALUE
Last year Michael Mackinven, a very successful Auckland-based investor and property coach, contributed one of the most popular articles of 2016 and a favourite of mine - How to identify the TRUE value of a property in your market.
When Michael asked what we could follow that up with, I thought lets see how the theory plays out in the real world. The case study
from last year is exciting and shows that with a proactive attitude it is possible to quickly make significant gains in property in a 40% LVR world.
You'll see some invitations to a seminar mixed in with the article below. Michael and his team launched Wealth Ladder last year and several iFindProperty clients became students. After hearing how well they went and seeing some of the testimonials that have come through we're happy to recommend Michael and his team in 2017. Michael will run some investor seminar evenings in Auckland and Hamilton over the next 2-3 weeks to talk about his strategies in 2017 and has given iFindProperty clients 50% off the door price (see details at the end of the article).
In the meantime, enjoy today's case study.
A case study - Solutions to LVR rules and understanding TRUE VALUE to make $110,000
While some details have been changed, this is a story of a recent student called Jess, who didn’t particularly like her job and joined seeking financial freedom through property.
Jess had belonged to a group for several years that taught property trading. She had noticed that the majority of "traders" did not make money - WOW. And the ones that did, often worked harder than in normal jobs. Jess did not enjoy her corporate job as a bank administrator but was procrastinating about leaving her job and investing because she didn't want to be embarrassed if things didn't go well.
Jess owned her own home and could get new lending to purchase an investment property up to $500,000, which wasn't enough to get "anything decent". Her goal was to quit her job and work in property full time. Her question to us - "what should I do?"
When any new investor comes to us we ask, "What is your dream?". A happy retirement with great memories of your life? A nice house and a nice car, with no debt? Kids set up and working so you can spend time raising your grandchildren? Changing other people's lives through your work?
Close your eyes and picture your dream. Can you see and feel it? Some people say, "I don't have a dream". We all have a purpose and a dream. It just needs to be found. Your dream will excite you because you are visioning your purpose.
Based on your dream you can create SMART (Specific, Measurable, Achievable, Realistic and Timed) goals and then get to work. Napoleon Hill puts it this way: All success begins with definiteness of purpose. You must know what you want.
Jess was clear on what she wanted. She wanted to leave her job and work in property. She also wanted to have financial freedom to give her children the best opportunities in life, a happy marriage and she wanted to mentor woman on how to live a bigger life.
Great dreams focus on making a difference for others.
Jess had to make a decision though. She felt somewhat uncomfortable trading properties again. She had tried that for a number of years and it was hard work and not particularly profitable. But she needed income. Should she quit her job and derive her income from property trading/property finding again?
Often in life, we compare ourselves to others. We beat ourselves up for "not being successful". We develop a negative attitude about our bum job, our bum wife/husband and our bum life. Look at the Jones' down the road, they have such a nice car, they are always happy and their kids get good marks at school. We must not feel bad about these thoughts as dissatisfaction motivates us, however we must learn to be content with what we have because otherwise you will always be chasing something external to you. Count your blessings no matter how meagre they might appear because only then can they multiply.
What Jess needed to learn was actually to enjoy her job - not what many people want to hear. She needed to learn to, "Go the extra mile", for her boss and colleagues - the ones who pissed her off every day. Only with this attitude could she ever achieve her big goals. The reality is, you must ask yourself, if you want a fancy car are you looking after the old clunker that you have right now? If you want a million dollars do you respect a 20 cent coin?
So, Jess recommitted to her job for just two more years and she promised herself to do more for her employer than what she was getting paid. We don't know the results yet, but she made an investment in her future, far greater than mere bricks and mortar.
Never be satisfied but always content and always do more than for what you are paid.
With Jess recommitting to her job she had security of income and a clear mind. Banks look at three Cs when lending: Cashflow (Income), Collateral (Equity) and Character. Jess had strong cashflow (income) from her job. She also had great character, being honest, hardworking and reliable. However, while she owned a family home with her husband, she did not have enough equity under the new LVR rules to purchase a property for any more than $500,000 (watch my video to learn more about purchasing property with the new LVR rules).
There are a number of solutions investors can use to work around the LVR rules. In 2016, the residential loan to value ratio throughout NZ dropped to 60% which has restricted investor's ability to purchase more property. There were FIVE key strategies for Jess to choose from:
- Equity in Home
- Second Mortgage / Private Equity / Family Loan
- Vendor Finance
- Second Tier Lenders / Asset Lenders
- Joint Venture / Limited Liability Partnerships
Jess already owned a home, enabling her to purchase up to $500,000 but she wanted to purchase a property up to $700,000. She talked to her financier and he secured a line of credit from a private lender for $100,000 (Option Two). While expensive money, it would allow Jess to purchase her ideal property, she could then "Renovate, Revalue and Refinance" and pay back the $100,000 to the private lender.
Jess could now purchase up to $700,000, but she still investigated cheaper options in a number of provincial towns. In the end, she settled for an up and coming area in Auckland that she knew, and was able to hone in on properties with higher TRUE VALUE than MARKET VALUE.
The TRUE VALUE of a property is equal to the MARKET VALUE + HIDDEN VALUE. Understanding this is an important skill to learn. By identifying properties with hidden value, you can create profit. In Jess's case, she found a property that had a high P level in the garage. Many people were turned off, but she knew that she could fix this problem and renovate the property for less than $50,000.
She negotiated a significant discount, purchasing the property for $590,000. Jess proceeded to renovate and lift the market value to $750,000, making $110,000 equity in only two months. She paid back the interim finance and now owned a cash-flow neutral property. What's more, the capital gains on the property, being in an up and coming area, will be comparatively well leveraged on Auckland's future growth.
Jess is focused now on being the best administrator possible. Her new attitude has not gone unnoticed and she received a pay rise. She is definitely enjoying her job more. Once a month, she leads a group helping other woman improve their lives. In two years, Jess will be mentoring woman and investing in property full time and in every respect living the life of her dreams.
Your situation may be different to Jess's, but you will have advantages to leverage that she didn't. Everybody has the spark within them that leads to success. Sometimes, all you need in your life is someone to show you the way and to believe in you.
If you would like to learn more about my current property investing strategies and how you can invest in 2017, come along to an event I am holding in Auckland and Hamilton in February. Use coupon code: ‘NEWS’ to receive a 50% discount.
I hope you enjoyed this article and I wish you all the best with your property investing success.
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