Forum Replies Created
I don’t personally know of an institutional lender that would not lend on equity in Australia for investment in New Zealand – if the numbers stack up.
If the loan is secured in Australia and you default, the asset in Australia is foreclosed or otherwise. The loan is not necessarily impacted by the New Zealand investment in this regard.
However, if the property you intend acquiring is not capable of servicing the loan [in the country of origin] – taking other income/credit history into account, then it is not likely an institutional lender will finance the transaction.
In terms of how many properties you should acquire in either market; the “number” of +CF properties you have in any given location is somewhat irrelevant in this case.
The key is acquiring properties which maximize your portfolios ROR – offer the highest income/capital gains over a defined period, and demonstrate the least risk.
— Michael
In a transaction such as this, you should not seek to claim the deposit from the person you sell too – unless you have access to sufficient funds if the person defaults.
Even with a clause that states you retain the deposit on default.
The result would then be owing the original seller the balance at settlement, and potentially repaying the person you sold too [the deposit] if they take legal action because you failed to comply or adequately disclose information.
This is a worst case scenario, but it does happen relatively frequently and can lead to severe financial problems for the person on-selling the property if not financially secure.
“Risk management” should be first and foremost when considering any real estate transaction.
— Michael
As noted, the land can be sold prior to settlement. We conduct these type of transactions on a regular basis with land and buildings.
The transaction should be conducted whereby the purchaser submits a deposit i.e. 20 percent – which is then held by your lawyer in a trust/escrow account until settlement.
The balance is paid to you on the settlement date. You then pay what is owed to the original land owner – work the two transactions in synch.
The key is “assigning” the land to the purchaser at a profit if at all possible. The difference between what you owe the original land owner, and what you sell the land for [less taxes and fees] is your net gain/profit.
The ROI is calculated as net profit divided by the deposit amount – which is always significantly more than if you acquired the land outright. A lucrative investment strategy.
The risk on your part is whether the purchaser will meet his/her obligation at settlement. If not you will be liable for the settlement amount.
However, if the purchaser defaults, you can retain the deposit if the agreement is structured correctly.
Before proceeding, you should discuss any scenario with a qualified lawyer and tax accountant.
— Michael
“gross ROI” and “net ROI” are not terms typically used, but in the books context they likely represent the “pre-tax” and “after tax” return on investment – I am not familiar with the book.
Terms commonly used to define “pre-tax” income include “gross margin” or “gross profit margin”.
“After tax” is defined as “net income” or “net profit”.
However, reference to “gross and net” is not generally used to define return on investment.
“ROI” is expressed as a “net” or “after tax” income or profit. It is calculated as the after tax [“net”] profit divided by the total assets.
— Michael
If reporters could accurately predict market trends, they wouldn’t be reporters.
We [US based] have researched and monitored the New Zealand market for several years and consider it undervalued in most regions/sectors.
Although we do not invest in SFH’s, similar principles apply when evaluating property for acquisition or development. If your due diligence indicates the investment is sound, then proceed accordingly, if not, move on to the next opportunity.
The terms [market] “boom” and “crash” are nothing more than media jargon from an investors perspective. No matter what the market dictates, there are always lucrative opportunities if you “think outside the box” and have a sound exit strategy.
— Michael
10 percent is the down payment on an OTP [off-the-plan] residential property – held in a trust account and only refunded if the developer defaults under contract.
You must then secure the remaining 90 percent prior to settlement – which will likely require a 20 to 30 percent cash or other equity investment.
— Michael
In response to your answer, there are several important considerations including;
1. Debt to income ratio i.e. how much of your periodic income [monthly/annual] is paid out on living costs – will this increase your risk if you decide to incur more debt i.e. buy another house.
2. Your financial goals i.e. do you have an interest in creating wealth through real estate – the more real estate you acquire, the more time and money is required to maintain the properties.
3. Risk i.e. as noted above, the more debt you incur the greater your risk. Will acquiring another property increase your exposure/risk elsewhere i.e. if money is required for medical expenses or necessary travel, for example.
Furthermore, you must ensure any loan is sustainable and payments will not be missed, which can result in the bank seizing your assets – including the current house.
4. Location and market conditions. If the market of interest has not demonstrated an increase in valuations [comparable homes in same location] i.e. over the last 3-5 years, then acquiring another house may not be the best option.
If the market has increased and reputable advisors [not RE agents] suggest capital gains will continue, then acquiring another house could be a sound investment – taking the above considerations into account.
Likewise, your decision to sell the current house is somewhat reliant upon market conditions. If the rent meets monthly costs [give or take a few dollars] and you are confident the market will appreciate over time, then there is no point selling the house unless you have to.
5. If you do decide to buy another house, the condition of the house/property, amenities, neighboring properties, etc are important factors to consider also.
From an investment perspective, choose a house which you are confident will remain in “demand” and not incur significant cost [unless it is clearly a value-add].
Spend the money on reputable building inspectors and advisors, because it reduces your risk and generally ensures you are buying a sound investment.
– As for the deposit, speak to a mortgage broker. The equity in the current house may eliminate the need for a deposit.
— Michael
For further information re: foreign tax credits, the following links should lead you in the right direction.
http://www.taxpolicy.ird.govt.nz/international/DTA/roleofdta.html
http://www.ato.gov.au/corporate/content.asp?doc=/content/33873.htm
[Glen] Most institutional lenders [no matter what country] stipulate that the borrower must be a “permanent resident” or citizen.
Because of this requisite, investors/buyers typically leverage banks/lenders in their country of origin, using local real estate or other assets as security. The funds are then invested offshore.
— Michael
Option [ii] may work. However, issuing shares is not always the best option.
Consider what you want the company to achieve in the future, and not just this one project.
If the project is conducted under your company name and is a success, you have established “equity” in the brand [company name] which can have a value attached.
The more successful the company, the more value is added to the brand. [this is one example of adding value in addition to profits]
If the investors exit on completing the first project, they are compensated for brand equity and other factors which increase the value of your company, in addition to a share of profits.
Furthermore, in addition to considering the future role of the company, your objective should be to limit your personal liability and maximize control/profitability.
If a shareholder does not meet expectations, or a financial committment for example, this can compromise the project and increase your liability – or worse case scenario, bankrupt the company.
Therefore, other options in terms of “structure” should be considered – and discussed with the appropriate legal and financial advisors – such as raising money under a partnership which invests in your project and can be dissolved when the project is completed.
Your company “XYZ” [you as sole shareholder] then conducts the project under contract with the partnership. XYZ retains an interest i.e. shares/units in the partnership to offset contribution/risk, etc.
The above example may not reduce your liability in the first project, but it will enable you to retain control of your company, and benefit from its ongoing success.
In response to your question, correct – a mezzanine lender bridges the gap between the capital you have invested and the primary lender.
— Michael
[WP] What do you think of the basic premise of buying the asset in a company, and then allowing other investors to invest in the company?
— Before setting up a company with the intention of raising capital, put yourself in the prospective investors position.
Investors will focus on several qualifying factors, including; assets [not necessarily tangible], you and your teams experience, prior success, market factors, risk, exit strategy, and comparable opportunities i.e. $1-2MM residential development in other locations.
If these questions stack up, then the investor will look at the rate of return – whether the projections are realistic, what contingencies are in place, etc.
I do not wish to discount this method of raising funds, but there are a number of factors you need to consider before moving forward – which can save you time and money.
In terms of whether setting up a company and targeting investors is a preferential option, I would recommend speaking with qualified financial and legal advisors.
It costs money to make money. Failed developments are often managed by those who try and cut corners during the early stages.
[WP] “Is this way preferable to mezzanine finance? How would they differ?”
— You often need to setup a corporate entity [company/trust] in order to secure mezzanine finance for a real estate development. However, mezzanine finance follows a primary loan – first note over the land or other security, mezzanine being “second”.
Before securing a primary loan, you need to complete a preliminary phase – at a cost [as noted in my earlier response]. Banks/lenders will not finance a development, no matter how large or small, based on the idea alone.
[WP] “If VF is treated the same as cash, surely this is the easiest and cheapest way to get finance”
— More than often if the development is feasible, the “easiest and cheapest” method of obtaining finance is an institutional lender. Savvy vendors will take a similar approach to private investors.
— Micheal
AUSPROP – Yes I have heard (and tried) other marketeers that clainm they can achieve full value OTP and they have teh magic database and packaging etc. Having sold OTP and finished no one will ever persuade me that OTP achieves the same prices as a finished product.
MICHAEL – the valuation is dictated by location, competition in the marketplace, the standard of product and how it is packaged, supply and demand, and the team behind the project. Not the sales strategy.
AUSPROP – my comments here were eluding to price point, townhouses being by their nature a much dearer product than single level. In Perth the market cannot accept or bear this fact and it reduces, in my opinion once again, the profitability of townhouses vs other styles in all but the premium locations
MICHAEL – see above.
AUSPROP – eventually it all comes home to roost and tax is a reality.
MICHAEL – tax is a reality, but not in excess of 50 percent.
AUSPROP – 20% is considered benchmark by most. In last years land squeeze guys were going in at less with the hope capital gains would pull them through. If it is your livelihood then 10% beats 0%, but its risky. I have heard margins on the east coast can be a lot better
MICHAEL – most experienced developers/RE investors will not move forward on a projected 20% ROR.
Less experienced developers should be even more cautious if the projected ROR is ~20 percent.
Subject to economies of scale, I am referring to the type of development referred too in this post.
AUSPROP – can you please PM me with some of these deals as we may be able to do something
MICHAEL – we are not seeking investors/JV partners, etc.
AusProp, I responded to your comments because I felt your initial response was misleading and inaccurate, in this case – possibly based on a personal experience. It would appear you did not consider the original question from an objective point of view.
OTP is not always the best approach, however if conducted in the correct manner, this strategy will often reduce the developers risk, provide financial leverage, and ensure [as much as possible] a profit is made on completion.
— Michael
With all due respect I disagree with most – if not all, of the above response.
“to sell off the plan you would need to offer some discount to their true value”
— Not necessarily. Supply and demand are two of the most important factors when evaluating an OTP development. Generally speaking, the project should not move forward if supply exceeds demand.
If sufficient demand is identified, the valuation does not have to be discounted on the basis of pre-construction sales.
“and selling OTP for a townhouse product isn’t easy”
— Again, not necessarily correct. As with any proposed development, you do not proceed if the market and/or feasibility study indicates there is insufficient demand for the product.
The product should also be “packaged” professionally – and there should be an experienced and reputable team behind the development to instill buyer confidence and limit the duration of the sales phase.
“To make enough to pay for the other two you would have to be making some extraordinary profits”
— The above statement is a general assumption. [Bear] has not specified the location, estimated price points, market analysis, cost of development, loan margins, etc. Therefore, how can one determine how many townhouses need to be sold to retain the remaining.
“and don’t forget that half of this profit would go in personal tax and another 10% in GST”
— A qualified tax accountant and financial advisor will ensure this is not the case.
“Developers margins have slimmed from 20% and out of desperation are dropping to as low as 10%”
— Media assumptions – or inexperienced developers? In reality, a development would not be a worthwhile exercise if the profit margin was as low as 20 percent. And certainly not feasible if the margin was below 20 percent.
“If you find a deal that you can do this with I would grab it fast, because there will be 100’s lining up behind you.”
— I would have to disagree. Real estate development is not for those who are inexperienced or do not understand “due diligence”.
Furthermore, we identify opportunities on a weekly [if not daily] basis which reflect the scenario you have outlined.
“Also you will often find that the profit is represented nearly as much by the capital appreciation in the land.”
— If the above statement was factual, we would all be farmers.
[Bear] in response to your question, you are correct to an extent. But there are a number of factors to account for in determining if this strategy is viable, including location, supply/demand, and feasibility.
— Michael
RE: “I believe you can purchase residential property in NZ no problem but commercial property you have to own a company.”
My understanding is commercial property can be acquired and owned by an individual or registered entity in New Zealand, Australia and many other countries.
In terms of a foreign buyer seeking to acquire commercial or industrial property in New Zealand, the law states:
“Where the purchaser is an overseas person or organisation“
You will likely find the trend toward acquiring commercial property under a registered entity reflects tax and liability issues, rather than a legal requisite.
— Michael
The average foreign investor will find it difficult to secure a loan in the United States through conventional channels – without a resident status.
Foreign investors can acquire real estate in the United States i.e. via an equity loan in the investors country of origin, or with cash reserves.
Alternatively, foreign investors can establish a corporate subsidiary or other entity i.e. in partnership with a [trusted] US citizen/resident and conduct acquisitions in this capacity.
— Michael
Institutional lenders may finance an offshore investment if the loan is secured in Australia.
Likewise, if you intend financing a property in North America, the loan will need to be secured in North America – unless a freehold acquisition.
In terms of the United States, you generally require US residency or citizenship in order to acquire real estate via an institutional lender.
— Michael
It would appear you intend selling the townhouses – with an estimated valuation of ~$1.3MM. Therefore, pre-sales [OTP = off the plans] may be an option to consider.
A personal guarantee is not necessarily required if selling OTP. In this case, primary lenders will often loan 70 percent [sometimes up to 80%] of the estimated valuation i.e. land + improvements – a [reputable] quantity surveyors report is required.
If a personal guarantee is not utilized, the lender will require a note over the land, and the “pre-sale” of at least one townhouse [in this case].
At 70 percent this may enable you to raise ~$910,000 [@ $1.3MM valuation] – although $400,000 appears low to construct two townhouses of a reasonable size and standard in today’s market – subject to location.
A secondary [mezzanine] lender can be introduced to secure 100 percent financing [subordinate note to primary lender] however, they will likely require the sale of both townhouses OTP – or a personal guarantee as security. The interest rate can work out at more than twice that of a primary lenders i.e. incl. origination fees, etc.
In terms of how much capital you require, the key to real estate development is “controling” land – not necessarily acquiring it. Therefore an upfront $600,000 outlay for land may not be the only course of action.
An option may be negotiated with the land owner whereby a refundable deposit is paid, and settlement is subject to meeting the minimum sales target, for example – which will satisfy the primary lenders requirements.
Or you may enter a joint venture arrangement with the land owner, where he/she receives a higher valuation in exchange for deferred payment i.e. when the townhouses are sold.
Personally, I would not encourage a joint venture with a builder because this is not often a value-add, where the land owner offers a tangible asset which can be used as equity.
A joint venture agreement is subject to many factors and should not be structured without qualified legal advise.
In summary, if you decide to sell OTP, the cost can be limited to preliminary costs – most of which are required before a bank/primary lender will consider a loan, including; research/feasibility, legal, planning, design and marketing – and land deposit if required.
If you intend retaining the townhouses, then you will require either a secured loan, or sufficient capital investment to satisfy the preliminary costs and primary lenders criteria.
— Michael
P.S. Vendor financing is in effect the same as cash/equity – but it must be secured by a note or other guarantee, as prepared by legal counsel.
If you are serious about attracting an investment partner, you first need to locate an appropriate site then conduct research and due diligence on a specific development type i.e. duplex, to determine feasibility.
From an investors perspective, an immediate red flag from your post is not having a site location, yet you know the financing target [$300,000] and return on investment [$30-50,000].
This is a direct indication of no experience, and on this basis my recommendation to those considering contact would be to proceed with caution.
— Michael
“Is the use of negative gearing in a boom market a good way of raising capital for future ventures?”
– in order to raise venture capital, for real estate or otherwise, you must demonstrate 1. a well researched and risk adverse method of investment 2. a realistic ROR [rate of return] 3. an achieveable exit strategy. This could transpire through negative or positive gearing.
“it is a lot easier in the current market to get properties which will raise in value 30-40k easily in 12 months”
– if finding [residential] properties that “easily” appreciate by $30-40K in 12 months was a simple task, it is likely most of the population would be independently wealthy.
— Michael
It would appear you have made the right decision.
Take one step at a time. Once you gain further experience, and establish a trusted network, the larger projects will fall into place.
Although keep in mind, just because a project is considered “larger”, does not necessarily mean it will be more profitable.
— Michael
I wanted to add that the following statement is incorrect in terms of the point of discussion – unless you intend becoming an investment broker or a similar position which requires licensing.
“you are required to have an Australian financial services licence which allows you to deal in these particular financial products”
— Michael
