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It’s September and the weirdness continues.

No I don’t mean our government, just the property market.  Only time will tell whether we are entering a true slump/flat phase or whether this is just winter combined with a raft of other minor issues.

Until the future unfolds and this becomes clearer I thought I would take you through some things that will help you stay safe and active over the next little while.

The first 2 points I posted awhile ago in my mentoring forum, so if you want to keep up with the latest info you should join  us at NZ’s biggest, (and I believe best by far) private online investing community!!

It is interesting that as media sentiment becomes more negative investors run for the hills. In reality this market creates more potential opportunities than at any other time.

Trading

1. Everybody thinks it is too dangerous to trade at the moment because there are no buyers. So how do we trade safely in this market?

A:Buy to order.

The simple fact is that people are always buying and selling homes. So rather than just looking for good deals and trying to find a buyer, start with a buyer.
I am working on several of these at the moment and there is no risk. Find what someone wants and give it to them. Almost all of you would know someone who is looking to purchase a property, offer to help them find it. You can contemporaneously settle or assign.
Understand that this is slightly different to a traditional property finder’s role. You will normally be dealing with an end buyer rather than an investor.

B:Demographics.

There is always an industry or market segment that is doing better than most others. By targeting that market segment for buyers you can significantly increase your success. For example what industry is currently rolling in money, dairy farming.
In fact I have a client who is looking for new properties to buy to reduce his tax bill, because his profit from share milking is so high.
So look for the industries where people do have money, and find a way to target them for investment property. Be creative!! I heard recently of someone who targeted pilots and he basically set up a network to help them invest in property.

Transactional Engineering 101

As an educated investor you should have better negotiation skills than an average home buyer. So a really simple way to create income for you is to assist people buying their own home. There are 2 “obvious” ways to do this.

1. If someone already has a property under contract and they are still conditional, you could offer to negotiate the purchase further and share any savings between the 2 of you. Your function is to explore any opportunities to negotiate the price down.
Given that this was an emotional buyer probably it may well be that they have simply paid too much so an RV would be a good place to start. If I can negotiate the deal by a further ten grand, which would be a walk in the park 90% of the time, you’ve just made 5 grand.

2. When someone is looking to buy a home get them to go and find the house they want, but they must not enter into negotiations to purchase. They simply come to you with what they are happy to pay for it.
You then enter in as a new buyer and negotiate the purchase from scratch, again with agreement to go halves on whatever you save them from what they were happy to pay. This should net you at least 10 to 20 grand a time.

If you are taking your investing seriously and treating it like a business this should be a walk in the park for you.  Most people are both terrified and emotionally caught up when it comes to property purchases.  They are the 45% of the population that pays too much.
You can help them and profit yourself.

Staying Safe

(Yes I’m going on about safety AGAIN)!!

Because we aren’t sure what the cycle is really doing we have to make sure our seatbelts are firmly fastened. So lets look at the 2 possibilities in terms of the current cycle and what action we should be taking, or avoiding.

1. Blip on the screen theory.

It is possible that we are simply in a winter micro cycle that looks like this:

Basically we are at the red arrow and things will improve again in a matter of weeks or at worst a few months.

If this is the case then it is really business as usual except that whatever strategy you are employing needs to allow for the fact that it could take longer than usual to sell right now.
Reno’s in particular are a great strategy in this situation because they can be purchased well due to slow sales and bad weather and by the time the reno is complete the market is heating up again.
Basically in this scenario the market has created a very small window of exceptionally great buying so we should be out there buying as much as possible while the bargains are lying around.

Bust Theory:
However alternatively we might be seeing the full property cycle tick over and we are actually coming in to this:

Now if this is the case we need to make sure of several things

1.    Existing portfolio rules:

In a slump phase it is critical that you did things correctly when things were booming to protect yourself now.

LOANS:
Your loans should be spread around as many banks as possible to avoid being too exposed if your LVR on paper goes up to a point where large lending with one bank could bring you to their attention. This is what sunk many people after 87.

Secondly you need to arrange for any increases in revolving credit or mortgage top ups NOW, (in fact now is a bit late), while valuations are still high.

RENTS:
Expect them to stagnate. We hope they won’t but that is what typically happens in a downturn.  To minimize this you need to be undertaking maintenance and focusing on keeping good tenants during this phase.

ADDITIONAL PURCHASES:
One of the frustrations of this phase of the cycle is that it delivers great bargains in terms of pricing and discounts, but is accompanied by high interest rates and low rents.

So depending on your risk profile and financial depth it is a great time to be buying additional buy and holds. As I have said before, there is never a bad time to buy a good deal, however this phase always pops up a higher percentage of deals than at any other phase.

2.    Trading Rules:

I have already given you some ideas for safe trading in the current market but if we are coming into a slump your primary concern needs to be to ensure that you only play with exceptional deals.
Talk to anyone who has been in the game a long time and they all agree that a slump offers the greatest opportunities but only to those who really know what they are doing.  This is not a time to be buying skinny deals and hoping that someone will magically appear and pay us a fortune for it.
That doesn’t mean we shouldn’t be trading, but that we need to be a bit more sophisticated about what we are doing to stay safe.

So the rules for trading revolve around 2 things:

A: Margin
You MUST know your numbers on any trade at the moment. If you aren’t certain that your minimum margin is covered then don’t buy anything.
Your risk of having to settle on a trade in this market is higher so you have to be absolutely certain a deal is a deal to cover yourself if you have to settle on it.
My rules are minimum gross margin of 50K on a trade and I don’t get excited about anything with less than 100K at the moment.

B: Strategies
The second thing is to be very clear on what strategies you are going to employ in this market.  Some strategies work well in a slump, some are high risk.

Safe Slump strategies:

Sandwich lease options.  Slumps are a fabulous time to relieve tired landlords of their rentals by guaranteeing their rent with an option to purchase and then leasing them down to buyers.

Buying to order:
There are always people buying property in any market, dealing with pre-approved buyers is great in a slump.

Large margin straight trades:
A deal that has huge margin in it and requires no work on your part, in other words buy it and contemporaneously sell it, works well in any market. In a slump ensure the margins are fat, and go for long term due diligence and long term settlement so you have time to secure buyers.

Off plans/green fields:
Because a slump is always followed by a boom this is often a good time to look at long term trade strategies where the market has a high chance of recovery before settlement.

Main things to consider are:

1. Is the developer financially sound, so that he will survive the slump and get the project built.
2. Is there a reasonable period of time involved so that time will create growth and minimize the downside risk?
3. Understand how to structure the deals with developers so that you are not exposed to risk, including options and deposit bonds.
4. This is my personal bias but avoid apartments like the plague. I deal every week with people who bought off plan apartments who are now in trouble. Even some of the developments where the people involved are saying how fantastic it has been and how everyone is making money etc. are often, well, lying.  Stick to freehold sections, house and land or quality commercial.

Related to the above is doing subdivisions and developments yourself.
As these often take a while I personally think a slump is a good time to pursue this strategy.  Building costs/surveyor charges etc. drop as the heat comes out of the market and the time involved means that things are going to be coming right as your builds get out of the ground.
There is a valid argument to say that slumps are always the smart time to look at small developments and subdivisions because you will work out the numbers based on the reality of flat market.  Then as things improve your margins are highly likely to increase.  It is the people who get involved in this strategy in the height of a boom and rely on continued growth to make money who often come a cropper.

High Risk slump strategies:

Leveraged finance options.
There is a lot of promotion of capitalized interest mortgages currently, sometime referred to as “cashflow” mortgages.
In a slump phase your risk of creating negative equity is exceptionally high. This is not the time to kid yourself that you have created cashflow when all you are doing is creating debt.
Another big fish hook I am waiting to appear with this product is that IRD could decide that the capitalized component is not tax deductible or at the very least that the interest on the capitalized component is not deductible. The more popular this product becomes the more likely it is to appear on the IRD radar

Skinny Deals.
Self explanatory, this is not a time to deal with small margin deals unless you are buying to order.

Narrow buyer pool deals.
You need to be careful with trades where your potential pool of buyers is very small, as in a slump that pool is going to be even smaller.
For example a big block of flats that would normally fly out the door as a trade in a boom, has a very small number of potential purchasers. You only can sell to investors with deep pockets who are looking for equity. There may only be literally a handful of people in the market in a slump.

Similarly with very expensive properties, you may not find a buyer even for a great deal as quickly as you would expect.  Any trade in this market has to have some wow factor or just be an exceptional deal to be safe.

And lastly but very importantly
STAY AWAY FROM SMALL TOWNS UNLESS YOU ARE AN EXPERT IN THE AREA!!

Know what you are doing!!
Bottom line is to be better educated than the rest of the market and be smart.

And speaking of education…

if you want to have the best information in the country about all of the above strategies and opportunities, we are very excited to tell you that our long awaited traders toolkit has finally arrived on the shelves!!

The Toolkit includes the entire CHCH trading workshop. The material is excellent, current market strategies and systems to help you succeed.  The Toolkit covers everything from a traders mindest and systems through to truckloads of step by step strategies that REALLY WORK!!

Trust me; you’ll get enormous value out of this material. Even the people who attended the event live are raving about the Complete Property Traders Toolkit!!

Saturday will be an inspirational day of learning how to work together, how to set achievable goals and learning to deal with our fear, negativity and self sabotage.
If you have a risk averse or fearful partner or business partner you need to attend Behind Closed Doors. Our 100% no questions asked money back guarantee means you have nothing to lose!!
Also compulsory for anyone wondering whether serious investing is something that is a good fit for their personality and risk profile.

Sunday is going to be awesome. We’ll be teaching you how to control multiple contracts and negotiations right trough to how to set up and run a successful office.
This includes preparing accounts, managing bank relationships, property managers, you name it, and Raewyn will teach you how to do it. She controls over 50 properties and tenancies from her desk.  Especially if you are new to the investing game,

Final Thoughts

Thank you all once again for your ongoing support and encouragement of Massive Action. We remain committed to bringing you the best property investment education and events in the country!!

Stay Safe ~  Dean, Raewyn and the team.

PS: Our furniture arrives tomorrow for the offices so this week I will finally get the video blogs back on track. In the mean time I am blogging daily so to keep up with Massive Action and Dean and Raewyn visit us at www.massiveaction.tv

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September 07 Newsletter