Archive for investing strategies
I guess we are learning from the last 4 years that the only certainty in investing is uncertainty. In New Zealand and OZ we are a pretty resilient bunch and I am surprised, almost alarmed at the positive sentiment being expressed by many investors I talk to currently. I say alarmed only because I know how much trouble I got into through a rapid unpredictable movement in the market and lending changes and I see many people potentially setting themselves up for a similar horror story right now.
I guess I don’t see an end to the worlds woes yet and so we have to assume that our own economy will remain at risk.
And if it is at risk then we must be conservative with our investing regardless of how gung ho we might feel.
You see the great depression created an entire generation of different people. More fiscally responsible, more averse to debt, more careful generally speaking. Yet the current situation, which is just as bad, seems to be teaching most of us nothing much at all. And that is scary don’t you think?
My investing rules and strategies are forever changed after the last 4 years. Prior to the GFC my simplified paraphrased rules were:
Buy 20% below value and only gear to 80% of that purchase price
Use banks to create leverage to increase your wealth
Buy cash flow where you can but high capital growth property was the real key to success.
Use trading to create deposits to buy more houses
Stick to areas you know.
And there’s nothing inherently bad about those rules. I made a great deal of money out of them in a short space of time.
But the current crisis has taught me that you either need to recycle your risk in short time frames by being in and out of markets so you don’t remain exposed OR have different rules that keep you safer.
So now my main rules would be:
1. Cashflow is King, every deal, even if it a trade must be significantly cash positive PRETAX.
2. Buy mimimum 50% below replacement build cost.
3. Only use non recourse lending or vendor finance. If any other security than the asset is required then don’t take the deal.
4. Get debt free as fast as you possibly can.
5. Go where the deals are geographically. Get educated but don’t ignore a market because it is unknown or far away. This limits my ability to achieve financial freedom
Now I’m not saying my new rules are “right” or “better”. My sole point is I have changed a lot. And yet I see so many investors starting to act like things are back to normal.
This frankly scares me for their sake. Business as usual combined with some incredibly bad “luck” in a couple of areas pretty much wiped me out once. That will never happen again because I have changed.
So what about you my friends, have you disaster proofed your investing rules yet?
Do it, do it now!!
If your vision doesn’t make you laugh, cry AND change, then it’s nothing ~ Dean
The funny, yet predictable thing however was the lack of questions from people. I don’t mean this to sound like a telling off as I don’t mean that but the whole idea was for people to ask questions to help them either overcome their fear of investing or to decide it wasn’t for them. So people will go to the trouble of registering and giving up an evening to join the webinar but then not ask any questions. Some did and this was mostly new people, so what is it that fascinated us enough to stay interested but too afraid to take action?
I am always glad when I talk someone out of investing as it means they weren’t ready and it means they can stop fretting about it and get on with their life but I know the energy wasted when you get stuck in an indecision. It quite literally drives you crazy eventually because your brain is telling you this is important yet unresolved.
So thought for the day at 5AM at the airport, timeframe your decisions. Work out whether it is a yes or a no then if yes DO SOMETHING, if no FORGET ABOUT IT
If your vision doesn’t make you laugh, cry AND change, then it’s nothing ~ Dean
Interesting times here in New Zealand. We can see the beginnings of a bubble in Auckland and Christchurch as the Auckland rental market is under supplied, caused in part by so many Mainlanders joining the JAFA brigade.
And in Christchurch the beginning of the rebuild plus all the vultures and speculators looking for how to profit from the rebuild are fueling extraordinary interest there.
Of course this is in stark contrast to the ever deepening recessionary pressures both here and globally which begs the question:
What exactly will happen if one market is so called booming while the country is going backwards. Is it possible for these 2 cities to be leaping ahead property wise defying the rest of the nation?
I guess the simple answer is yes it can happen as we are already seeing it happen in suburbs like Grey Lynn where houses are fetching mad money and competition is fierce at auctions.
But as investors what should we do?
Let’s take a pessimistic view that the country/world is going to be a mess for another 5 to 10 years. If we have a bubble in Auckland and prices increase we can potentially profit by trading in a rising market. That is childs play. But the enormous risk is that the bubble bursts driven by banks not lending to the levels properties are selling for in Auckland or an ever worsening economic outlook causing lending to tighten again.
Most active investors seem to be doing one of the following two:
Running around in Manurewa and Otara and other very low socio economic areas buying and renoing or buying and holding.
I think this will ultimately be a disaster for most of them. We sold out of South Auckland as soon as we could and would never go back there. Maintenance, rental issues and most importantly sliding values make it a very bad idea. (NOTE: I do not include Papakura in South Auckland, that market has consistently performed amazingly well.)
OR they are basically doing nothing. I think this is quite a good strategy right now. Sit out things in NZ or look offshore is not a bad idea. I talk to agents daily and professional finders around the country and the overall outlook is somewhere between muted and terrible so we can’t afford to get bullish yet.
Keep your powder dry!! Don’t be rushing in in New Zealand, there is much uncertainty ahead!
PS: Our next training webinar is going to be “HOW to research a property/area in the USA”. Book HERE
This article is from John Talbott, a consistently anti property author and researcher. It is a must read regarding the US market.
I have been waiting for more than five years to offer this advice. It is now time in most cities across the country to buy a new home or refinance your existing home with thirty-year fixed rate mortgage debt. And this from the author of The Coming Crash in the Housing Marketpublished in 2003 and my 2006 book, Sell Now! The End of the Housing Bubble. Let me explain why.
Home Prices Relative to Peak Prices During Bubble
Home prices are off anywhere from 10% to more than 60% in cities across the country. There is no reason to believe that prices were “fair” during the bubble as we have seen they were largely caused by loose and aggressive lending by banks and non-banks. But, it is always better to buy at a discount rather than at a historical peak, and these seem like awfully big discounts. And by my calculations, in most cities across the country, real prices adjusted for inflation have just about come into line with where prices were in 1997, before all this crazy bank lending started, so there should be little additional downside risk by buying today. There are still some neighborhoods across the country that have not seen very dramatic declines in price, many of them very wealthy and expensive enclaves, but given the distribution of incomes lately heavily weighed toward the wealthy, these areas may never see a really large home price decline.
Home Prices Relative to Construction Costs or Replacement Costs
Homes in many cities across the country are now selling for as little as $60 to $70 a square foot. Depending on the quality of construction and the underlying land value, this represents a 50% to 65% discount to the costs you would incur if you tried to build a similar home today in these cities. While there is no guarantee that there will be a strong rental market in the short run, in the long run it just seems to make sense to buy if you can acquire assets at half or less of the cost of building them.
Home Prices Relative to Incomes and Rents
During the peak years of the housing bubble, entire cities like San Diego were seeing their homes priced on average at 11 times the area’s median family income. Such prices financed primarily with debt are by definition unsustainable. Now, because banks have pulled back on their lending formulas, homes in many cities are changing hands at three to four times average family incomes. Similarly, at the peak, houses traded at such large multiples of possible rents that it made the projects uneconomic from the start. Now, with homes trading at more reasonable multiples of rents, houses and condos can be purchased that are immediately cash flow positive in year one and enjoy all the upside of any appreciation that will occur as inflation returns.
Home Prices in Real Terms, Not US Dollar Terms
We still talk about home prices in dollar terms, which is silly because the dollar has lost 98% of its purchasing power relative to a more stable asset like gold over the last fifty years. If instead of pricing houses in dollars, we look and see what a home would cost in ounces of gold, we see that houses today are a real bargain. As a matter of fact, this graph shows that average homes, measured in the number of gold ounces it would take to buy them, are now trading at forty year historical lows.
You might argue that this is because gold is priced highly today. I would argue that gold’s purchasing power has changed very little over time, it is the dollar that is depreciating and thus giving the appearance that the price of gold is rising. Actually, gold is quite stable relative to other assets and commodities and it is the dollar that is highly volatile and declining in value due to the US funding its deficits by printing dollars.
The Real Bubble – US Treasuries and Future Inflation
The real bubble out there is longer US Treasuries and 30-year fixed rate mortgages for home-buyers. With US debt equal to its GDP and equal to more than four times our government’s total tax revenues and with annual deficits of $1.3 trillion and growing, it is amazing to me that people will lend to the US for thirty years for less than 3.0% a year. Even more amazing is that individual homeowners can borrow at 4.0% (around 3% after tax) for thirty years on a fixed rate basis, some 300 basis points better than Italy which has a lot more people and makes much better shoes.
Homes may not appreciate greatly in real terms over the next twenty years, but they don’t have to if inflation comes back, which is the only way the US and Europe are going to get out from under the huge debts on their countries and their banks. You may not make a lot in real terms on the house, but if inflation returns, you could make a killing on your investment as your thirty year debt becomes worth less and less in real terms. Run the numbers, but if inflation and interest rates go back to say, 7% to 8%, you could easily make eight to ten times your equity investment on the house because you locked in your borrowing costs and home appreciations historically have always correlated well with unanticipated inflation.
So, run, do not walk to your neighborhood banker and either finance a new home purchase or take out the maximum amount of money he or she will lend you on a home equity loan and buy hard assets, not financial securities, with the money. When inflation comes roaring back the only perfect hedge is to be a borrower, not a lender or investor. Shakespeare said, “Neither a borrower nor a lender be,” but they didn’t have huge government deficits and the risk of future inflation back in the Bard’s time.
Get Going and Stay Safe ~ Dean
(If you’d like any info on or help with investing in the USA drop me a line HERE)
I remember at the beginning of the so called “GFC” there was enormous debate and ringing of hands over whether this was a recession or a depression. Nobody wanted to allow anybody else to call it a depression because that would be negative news, harder to stomach and technically “untrue”.
So in the end everybody agreed that this was only a recession and we all smiled. Oh it’s only a recession, we’ll be through this in no time and this has happened before, just relax.
At the time I said there were 2 ways to get through this for any nation, option 1 was to allow the economy to find its floor quickly so that the pain ended quickly and then rebuild on a genuine floor.
Or pretend things weren’t too bad and hope for a soft landing by propping things up until a real recovery occurred.
Well it’s now 2011 and things are getting worse, again, because we still haven’t recognised the need to find the floor. As I said yesterday we now have given China power over the world by looking to them for assistance with recovery by falling over ourselves to become trading partners and taking every dollar they would spend with us.
Most economies are now in much worse shape than they were 4 years ago because they have huge interest costs to pay on top of the principal they owed in 2007. An fact many countries are now hoping for a miracle to service their INTEREST, forget trying to pay the principal .
I bring this to your attention solely to highlight the fact that sometimes reality is a good thing. We needed to recognise in 07 that we were up to our earlobes in bovine eschatology and governments could have embarked on an austere economic reform system to dig themselves out of this and rebuild on a solid foundation. Ignoring that has cost us all years of pain.
Now the upside of this, (every cloud…….), is that interest rates and house values are going ot remain subdued probably for many years to come.
So we have the perfect cash flow storm courtesy of our fear of the word “depression”. This is wonderful news for anybody able to get going with investing and we will see more people retire off the back of this fiasco than any time previously I believe because the opportunities are unprecedented.
Get Going and Stay Safe ~ Dean Letfus
I read with much amusement the raft of recent advertorials about the recovering market. Even some of my peers are telling me how rosy the market is. NOw of course in some very specific locations, especially higher priced properties, the market is doing well. This is a supply and demand issue and probably represents less than 1% of the market. A handful of properties in locations where the purchasers are well heeled does not a national market make.
I have sold 2 properties in the last 2 weeks, one in an investor area and another in a relatively blue chip area. In both cases we marketed well and had outstanding agents on board.
In BOTH cases the properties were given away compared with their less than 3 months old valuations, well over a hundred grand under in one case.
In BOTH cases the final sales prices more closely represent 2003/2005 levels.
So don;t be fooled by any hype. It is a buyers market still. Most buyers want fully renovated, gorgeous quality homes for the price of a shack and that if anything is becoming more embedded in our market.
So anything that is considered B grade, even in an A grade location, can be picked up heavily discounted.
We had to market one home at 200,000 under it’s realistic value to even get any interest. And that is in an area that people die to live in, in one of the best streets in that area.
Money seems to be freeing up at least anecdotally so check with you broker, you may be able to borrow money now that you couldn’t 6 months ago.
Now is the time to get going in New Zealand.
And if that doesn’t work for you we now have bank lending in the USA for you
Get Going and Stay Safe ~ Dean Letfus
I was reading a guru’s website today singing the praises of finding the path of least resistance. The theory is that success comes fastest if you find the easiest route to success. Comparisons with beautiful flowing rivers etc. are used to make us think about how easy our life could be if we could just find this easy path.
The problem with this wonderful idea is that it is total bollocks .
We were designed to push against resistance from cradle to the grave. We had to fight our way out of the womb, our muscles only develop when we use them and paths of least resistance have to violate the fact that most things left to themselves become increasingly chaotic. Look at the back of your garage for example.
It’s a bit like another semi myth called “passive” cashflow. Now don’t get me wrong I am a great believer in passive income but it is rarely ever going to be completely passive. If you spend a lot of time, energy and money building a great property portfolio you would be stupid to hand it over to property managers and never have any interest in your properties ever again. You would manage the managers, keep a watchful eye on the markets etc. and generally make sure your investments were being looked after right.
So let’s get off this fantasy train of success being easy, attractable and hard work being somehow second best.
I have learned that by doing now what others won’t do, that is WORK HARD AND SMART, then when I am older I will be able to do what everybody else can’t do, ENJOY MYSELF AND BE FINANCIALLY FREE.
Enjoy yourself along the way of course but if you keep looking for the silver bullet you just might end up on the receiving end of it
If I was looking for the path of least resistance I would have a sex change, have as many kids as possible and let the government pay me to do nothing!
OK rant over, back to work. But remember, work hard now so that you can relax later. Don;t look for the short cut, look for the best way to achieve the long term result!!
Get Going and Stay Safe ~ Dean Letfus