The secret to making money owning real estate

The secret to making money owning real estate

After 16 years in the real estate industry (5 years in software, 11 in sales) I have learned that the secret to making money owning real estate is….. to never sell.

That’s it. Never sell.

That might sound crazy coming from a guy who makes his income selling property but I have always promised myself that I would be upfront and open with my beloved readers about our industry and this is a critical point that too few people really understand.

We have all sat around dinner tables with our parents, or people of their generation and listened to them talk about the first property they bought and how it cost them 17,000 pounds or some such ridiculous figure. We listen to them say things like “If only I still owned that place, it would be worth squillions now…”

According to the same older generation. Many years ago Ponsonby, Auckland used to be a complete dive and you couldn’t give properties away. Now you need $1 million just to buy an apartment.

I have a long time mentor who also happens to be the most successful property investor I know. Real estate investment has given him financial freedom, opportunities to travel and a lifestyle most people simply never get to experience. He has repeatedly told me his only ‘real estate regrets’ are the properties he sold years ago, thinking it was a good idea at the time, that are now worth 10-15 times as much.

When clients invite me round to talk about the market, find out what their home might be worth and how they should approach selling, I often end up spending most of my time there trying to convince them to hold on to their property, to keep it as a rental when they go and buy another home.

Interest rates are so low now that even a typical 3 bedroom home in Newlands can usually cover its costs, depending on how large your mortgage is. A typical 100sqm first home might be worth $550k or more but could rent for $530 per week. That is a pretty terrible 5% yield but it’s possibly enough to cover expenses with current interest rates.

Check median rents in your area here: https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/

Let’s say you own this type of home, you have a mortgage of $350k, but you want to move to somewhere like Aotea.

Option 1: You could sell now.

Sale price: $550,000

Costs:
– Commission & Marketing ($16,000 approx)
– Legal fees ($1,000)

= Net Result after costs: $533,000
– leaving you with $183,000 after you pay back your mortgage which will probably become your deposit on your next home.

Option 2: Keep your existing home as a rental

Rental income: $27,560 ($530 rent per week x 52 weeks)
– Mortgage (interest only): $17,000 (based on a $400k mortgage at 4.25% interest rate)
– Insurance: $1,000
– Repairs & Maintenance allowance: $3,000
– Rates: $2,500

= Net income after costs: $4,060 (or $78 per week, which could help cover the principal portion of your loan)

Equity = $200k (Your net worth is already $17k higher than if you had sold)

Note: You can still ‘use’ this equity to help with your deposit on your next home. Remember – banks will lend you 80% on the home you occupy and 65% on an investment property.

As you can see in the example above, the property should pay for itself. However, it’s important to remember you will likely borrow more against this home because when you own 2 properties you want as much debt as possible to be registered against your investment property, not your own home. For more advice on this speak to a good accountant.

Note: Always remember the difference between good debt and bad debt. ‘Good debt’ is debt you owe against investment property. ‘Bad debt’ is debt you owe against your own home. For more on this, check out that old classic, Rich Dad Poor Dad, by Robert Kiyosaki. Good debt is covered by the rent you receive on an asset which is making you money (hopefully). Bad debt is a liability which can limit personal freedom (eg. you have to keep working to pay the mortgage).

Now, the best part is…

If the property goes up in value, say 10% over the next year, then suddenly your investment property is worth $605k.

Equity = $255K.

You just made $55k in one year without having to go to work (and your net worth is $72k higher than if you had sold). How ridiculously good is that?

Yes it is a bit more complicated than I am explaining here and yes it will probably mean you can’t afford quite as nice a home in Aotea (or wherever you are looking), and there is no guarantee property prices will go up, but what a difference it would make to your long-term financial security if the above scenario plays out!

Are you interested in finding out if you can keep your existing home as a rental when you move?

Step 1: Get a registered valuation done on your current home (cost: $600+). You might have a lot more equity than you currently think. I use Bill Sisk from Valuation Consultants NZ Ltd.

Step 2: Get a rental assessment done for your own home. (cost: free usually). We recommend Rental Results.

Step 3: Speak to a mortgage broker (I highly recommend Jenny Cheevers) and ask this question:

“If I were to keep my current home, based on my valuation and rental assessment, how much will a bank lend us on a new property? What kind of home can we afford to buy with our current savings/equity?”

It can’t hurt to ask the question. What is the worst that could happen?

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Andrew Duncan

I love working with nice people, enjoying plant-based food, CrossFit, NFL and living in Wellington, New Zealand.

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