Flawed strategy from commentator

Tuesday 4 December 2012

Bernard Hickey has pitched himself as a property guru in the New Zealand market, however the strategy he outlined in the Herald on Sunday last week, if followed would likely end in failure.

Indeed it is a strategy that a number of high profile property gurus followed when the real estate market last boomed. Most of these people ended up being bankrupt.

One of the things that is concerning about the strategy outlined is that banks are unlikely to buy into it.

 Mr Hickey suggested using the equity his home to buy lots of investment property using high loan-to-value ratios. In other words have the banks pay for them.

 The NZ Property Investor magazine has just completed its annual survey banks’ lending criteria.

 What is interesting is that  while banks have eased up on their criteria, most of them are still most interested in lending proposals where the borrower has a good chunk of equity in the deal.

 I doubt any bank would lend on the strategy proposed by Mr Hickey. If they were too consider it no doubt he would find himself a customer of the business banking arm of the organisation – and they have much more stringent rules than for the people with a couple of properties.

 No doubt with a strategy like that proposed Mr Hickey would also be considered in the business of property investing and Inland Revenue would be very interested in his activities.

 He may even end up as a client of its Property Compliance Programme which is charged with making sure people pay the correct tax on their real estate transactions.

 Any capital gains would end up being taxed.

 I always find history provides investors, no matter what asset class they favour,  a useful tool for learning.

 It wasn’t that long ago that various other so-called property gurus adopted strategies like this.

 When the market turned, as it inevitably will some time, the spruikers will end up in bankruptcy.

 Go and read the article we ran earlier this year where people like Dean Letfus told the story of where they went wrong.

 The one part Mr Hickey did get right was the supply and demand imbalance in Auckland. This imbalance has been created by many factors including geography, population growth and house building rates.

 Until these many issues are brought into some semblance of equilibrium then it is an attractive market for people, whether investors or owner-occupiers, to buy real estate.

 If you are an investor have a clear strategy and be prudent with the amount of risk and debt you take on.

 Someone has to own the homes. If it stacks up for investors then don’t be afraid.

Comments from our readers

On 4 December 2012 at 1:18 pm Andrew said:
Isn't it interesting that all the 'wise' heads are now saying that highly leveraged investment properties are a bad idea? It seems that the tide has truly turned. I can remember several articles in your property magazine in the 'naughties' lauding various smart people who were following this very way to get rich. I also remember how I was considered conservative and old-fashion when I spoke and wrote about the dangers of high indebtedness. The wheel turns again...
On 4 December 2012 at 5:58 pm Tom said:
I agree with Andrew, but a good investor needs to fashion their strategy with the times they are investing in. Yes, in the late 90s I borrowed heavily, (at a 95% ration at one stage), improved some properties to on sell and kept a couple that I still rent. They were exciting times. The aim was to leverage and remortgage to buy more. But as times have changed, and after some stomach churning moments, so have my views and my strategy. All in all, 13 years down the track, I am on the better side than if I had invested in Finance companies, like a friend, and at 48 was able to semi retire, personally debt free and am now paying down my lending as fast as possible to (hopefully) have 3 rental incomes with no borrowing within the next 5 years. I still believe it is worth the risk if you buy right in the first instance - and don't get greedy!.

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