Top Investor's Best Deals & Biggest Lessons
Established investors reveal their best and worst deals and the strategies behind them, writes Joanna Jefferies.
5 April 2018
In order to know whether an investment strategy will work in the long-term, you have to test it out a few times, right? But the potential for a major disaster prevents many investors from committing to what might look like a great deal. Fear not, we’ve spoken to some established investors, who’ve stuck their necks out more than once, and lived to tell the tale, so that you don’t have to make the same mistakes. To give you a shortcut to buying success, they’ve revealed the strategies that secured them their best ever deals and also the ones that taught them their biggest lessons.
Best Deal:"Develop To Hold Strategy
David Whitburn has been in the property investing game for over 25 years. Although he’s now involved in large multi-unit residential development, he says smaller developments can yield an incredible result for investors who have existing property with land, or who can purchase a property with the potential for subdivision. A recent two-lot subdivision he did in Auckland is a prime example of creating equity through developing existing land, he says.
The property he owned was 850m2 with one dwelling on it. Whitburn subdivided the property into two at a cost of $130,000 and the spare section was valued at $450,000.
“I had $10,000 of holding costs and I’ve made $300,000 equity out of my back yard. That’s a good way of making some money.”
Whitburn then spent $350,000 building a second dwelling on the property and it was valued at $930,000.
“A lot of equity was created from doing this and that’s a great thing, because it’s a way we can make some good money with the small amount of, manageable, risk involved in a subdivision. [Subdivisions] are not overly complex unless you have drainage concerns and they can be looked after, in most cases, by a planner, a surveyor and civil engineer.”
There was, however, a 20-month time frame. But Whitburn says investors need to look past it: “Does that timeframe really matter when you’ve made that much money?”
Biggest Lesson: Failing To Act
Whitburn says he’s seen an investor mate not do a letting check and wind up with $70,000 damage from a P-lab. But that mistake pales in comparison to the one he made, when he first started investing in 2002.
“In the first year I started investing I bought two properties within a year and I should have got this one. It was $220,000 [a two-bedroom unit] and a 200m walk from Remuera shops. I thought it was a little bit highly priced – maybe by $10,000, now it’s worth over $1 million and I’m feeling like a little bit of an idiot.”
Whitburn says failure to take action was his biggest mistake. Too much time spent on due diligence, and trying to achieve higher cashflow targets, meant he dwelt on it too long and had “paralysis by analysis”.
Instead he bought in Manurewa – the cashflow was a lot higher but it had more tenant damage, the repairs and maintenance were higher and the capital growth was way lower.
“All because the cashflow wasn’t quite high enough … You’ve got to be kidding me! Of course, I made some money out of it but I’m kicking myself.”
He says this has taught him two things: that you cannot deny the importance of capital growth – not just in house prices but also in income; and that failure to act can cost you more than the damage from a P-lab in a rental.
Best Buy: Counter-Cyclical Strategy
For the bulk of the 20-odd years Hamilton investor Nancy Caiger has been investing, she’s bought countercyclically. This means when the market’s down and there aren’t many buyers around, that’s when Caiger will be putting in offers. Another key to her strategy is she never buys only for yield, she seeks an upside where she can add value. Her best buy falls into both of these categories.
“The one that has given me the best return is a property I bought in 2002 in Dinsdale, Hamilton. In 2002 the market was pretty down and people were under financial pressure. I think the bank was on their back and they couldn’t complete [the subdivision they had started].”
Caiger bought the three-bedroom house and land for just $168,000 and completed the stalled subdivision. Subsequently, she built a second dwelling at a cost of $350,000. The rent from the initial house was $220 and is now $400 per week and the new dwelling, which initially brought in $300, is now bringing in $420 per week.
“Today I would say the two properties are worth just over $1 million dollars.”
These days properties under $200,000 are thin on the ground. However, going against the grain of market buying trends, and looking for an upside, has been a highly successful strategy for Caiger and can be applied at any time in the cycle.
Biggest Lesson: Not Buying With The Tenant In Mind
When Caiger bought a large block of 10 units in Claudelands, Hamilton, multiple income streams were on the agenda. But the exercise was more headache than profit she says.
“What I learnt from that is it’s not straightforward when you have people living in such close proximity to each other … the dynamic can work but it may not.”
The tenancies kept changing, one tenancy would be filled and another one would become vacant.
‘I say to investors: Decide what sort of tenants you want and buy the property that those tenants are looking for’ NANCY CAIGER
“It was constant – all because of the nature of the property,” says Caiger. It “crystallised in my mind the type of tenancy I want to deal with”.
Eventually she sold the unit and went into the higher-end market. The maximum number of units she has on one site now is a duplex.
The lesson for investors: “I say to investors: decide what sort of tenants you want and buy the property that those tenants are looking for.”
Best Deal: Buying With A View To Recycling Equity
For full-time investor Kesh Maharaj it’s all about return on investment (ROI). He has strict criteria for buying and this includes the size of the land and access to future local infrastructure. The deals he prefers have the ability to create equity, thereby enabling his next deal.
In 2003, he secured what he considered an “exceptional” deal in Papatoetoe. He was looking to secure anything that was 50% or 60% below market value. The plan: to recycle equity within three to six months.
The Papatoetoe property was 800m walking distance from the railway station and AUT had been given approval to build nearby: it ticked the “infrastructure” box.
Maharaj had an agent (he says he now has 80 or 90 agents source deals for him) ring him about a property in very bad condition and the vendor wanted a quick sale:
“They wanted $290,000 for two, four-bedroom houses on 850m2. It was probably [worth] $350,000 retail. I raced out there.”
Maharaj saw huge potential in the deal. He immediately engaged a property consultant to have a look at the structures, and they were given the okay. He also went to the local council and got a report on the property. It turned out the back house didn’t have a certificate of compliance which was putting off other buyers. But Maharaj simply delved a bit deeper and was assured by a planner that it was likely to get “across the line” should he want to pursue a code of compliance certificate.
“I started off at $180,000, which they didn’t accept. Then I went for $204,000 which they accepted.”
It was only Maharaj’s second or third deal.
“Literally the next day I was getting offers $50,000 above what I had paid [for it].”
He went about getting the code of compliance and made minor renovations and updates at a cost of around $25,000-$30,000. He was then able to rent each house out for $350 per week (rather than the $250 quoted by the agent).
But the real potential was to subdivide it into two sections, which Maharaj is currently in the process of doing. The land is now worth $960,000 and, including the houses, it’s worth around $1,200,000 – and it owes him only $100,000.
“It’s the perfect example of taking action,” says Kesh.
Worst Deal: No Control
Like Caiger, Maharaj shies away from multi-unit properties – but not for the same reasons.
A two-unit investment he bought in Manurewa in 2007 for $260,000, (which was [$60,000] under the market value) seemed like a good buy. But the solid brick and tile was down a long driveway and this deviated from Maharaj’s usual strategy.
The property was plagued with burglaries and the tenant turnover was a hassle.
The property didn’t live up to Maharaj’s other rules of being able to create equity and the capital growth wasn’t impressive. “I look at it now, the value in today’s market would probably be $600,000.”
“Going forward I probably wouldn’t buy units. [A bad deal] would have to be any opportunity that you couldn’t create equity, projecting out to five or ten years. Body corporates, shared driveways, [all] mean a lack of control.”
Maharaj also isn’t a big fan of apartments for this reason: “The body corporate can decide what they want to do and you don’t have control over it. Land is where it’s at.”
Best Deal: Multiple Income Streams
While Maharaj likes to stay away from units, because of the complication of body corporates, Christchurch investor, Liz Harris, targets units for their highcashflow potential. One particular multi-income stream buy comes to mind as an exceptional deal: An Art Deco block of old motel units bought two years ago. The block of 17 was used as accommodation after the Christchurch earthquakes, and was in poor shape, so Liz’s daughter painted the exterior and the interiors were renovated at a total cost of around $300,000. The rents were set at $220 per week, and they’re up to between $375 and $400 per week post renovation.
From the total investment of $3,300,000 it’s more than paying for itself – “We are probably getting $100,000 off it [per annum] after expenses,” says Harris.
Okay, so you don’t have access to a multimillion dollar outlay? Harris says it can be easily replicated on a smaller scale and buying property with multiple incomes is a strategy that’s served her well over her past 37 years of investing.
‘I’m a great fan of anything that has more than one unit on it because you’re sharing the land [costs] and getting more income’ LIZ HARRIS
Biggest Lesson: Check Your Insurance
Harris had a building on the corner of Barbados and Oxford Terrace, in the Avenues, badly damaged in the Christchurch earthquakes and it had to be demolished. So why was that such a big deal? Well, it turns out the building wasn’t insured. But, despite the loss of the building and no ability to claim, Harris says it wasn’t the worst thing to happen. It’s a very sought-after area and she’s since built 12 apartments on the land. The moral of the story: time is the tonic for most disasters. To that end, Harris is a huge proponent of the buy and hold strategy: “We hold it all and we never sell.”
Best Buying Tips
There’s no one rule in finding yourself a “best buy”. Each of the investors interviewed have forged their own niche in the world of residential property investing and had great success. They share some of their key buying advice:
- Each market is different and you need to know your tenant niche, says Caiger. To that end: “Decide what kind of tenants you want and buy that style of property. Don’t buy a student property and wonder why you keep getting student applicants.”
- Failure to act can be a big problem, particularly for newer investors. “Sometimes we get too many opinions and we decide not to do something. We get a bit stuck and think of reasons why not to go ahead. But we have to think of reasons why to do [it],” says Whitburn.
- Harris always looks for multiple income streams and her biggest complexes have 200 people renting: “I’m a great fan of anything that has more than one unit on it because you’re sharing the land [costs] and getting more income.”
- Buy when no one else is: Maharaj was looking for a family home last year and put in an offer, during the period of the general election, which was accepted by the vendor. The clincher: only three doors down from his, a near identical home had sold, before the election period, with an additional 17% added to the price tag.