Property investing is a game you win by beating averages says Peter Aranyi. Do not fall for the sizzle aimed at the gullible, he warns

Peter Aranyi explains how the property spruikers pitch and how to recognise the hype. Image sourced from Shutterstock.com

By Peter Aranyi*

There’s a lot of ‘secret sauce’ and bunkum sold in the‘How-you-can-get-rich-investing-in-property’ game.

Property spruikers and salesmen of all kinds will try to sell you on their Ten Step Magic Programme to Profits.*

Some will promise you the sky - basically, they will say anything to get your money (and ‘Strictly no refunds’).

Some of these ‘Millionaire by Monday’ hype merchants are very slick and motivational.

Others seem more genteel, less rubbery, and more down to earth. But frequently (always?) they come up short on specifics, or they’re a one trick pony, pitching the same approach (e.g. do-ups in a low rental area) for everyone.

Be wary. Avoid them.

I mean it.

Years ago a friend of mine taught me that property investing is a game you win by consistently aiming to beat the averages.

For example, say you’re looking for a rental property, it works like this:

If you can buy a house in a better than average area (defined by a record of better than average capital growth, therefore better than average prospects), and you negotiate a better than average deal** or finding a ‘twist’, then you do what it takes to get a better than average rent, selecting a better than average tenant — and you make sure to manage the property better than average …. well, you get my point:

You’ll do better than average.

That just makes sense.

For myself, I’ve learned that success in investing (or any other arena, actually) is not about finding a ‘Secret formula’ or ‘Turbo-charging your investment success’.

Yes, sure, that’s how things are sometimes sold … selling the sizzle … but often success is a process of taking a few right steps, getting the right advice and information, and (crucially) following through.

Sometimes it’s about keeping your nerve, staying on a path, doing the work, then reaping the rewards. (Are there any guarantees? No. Bad, unexpected things can happen. Consider the impact of the Christchurch earthquakes.)

Some operators (I’m using polite words) use pressure tactics to pitch the gullible on a quick profits scheme or a plan like Blackadder’s — you know, ‘A plan so cunning you could stick a tail on it and call it a weasel.’ I’ve seen so-called ‘investments’ sold on their ‘tax benefits’, and thinly-disguised rip-off schemes and rorts targeting lenders, where the ‘buyer’ is a victim too.

The trouble is, time and time again I’ve seen those involved in those schemes come unstuck — sometimes really badly unstuck.

Under the near-hypnotic influence of a smooth salesman pitching a ‘Tonight only! Price goes up tomorrow! Buy NOW!’ offer, otherwise sensible people fail to get professional advice (or worse, ignore it!)

Don’t be like those people who throw caution to the wind, setting up turmoil in their personal and financial affairs by greedily chasing the latest novelty Get-Rich-Quick ‘investment’, sometimes paying tens of thousands for ‘Secrets Only Millionaires Know About Investing’.

Sometimes people are sold ‘Access to an EXCLUSIVE circle of like-minded people’ where it turns out, the newbies are really just a pool of suckers for the predators running the show … or fresh meat for their property trader and developer mates who profit by selling them ‘Hot Deals’.

We’ve all heard the line, ‘If it sounds too good to be true, it probably is’. Yeah, well. Believe it.

For the sake of argument, assume just for a moment that I’m right:

Success will come to you if you consistently do a finite number of controllable things better than average. That doesn’t sound as sexy as ‘Millionaire by Monday’, does it?

But you know what? It actually is.

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* I made that title up. I’m not referring to anyone specifically.
** Price or terms. They’re somewhat interchangeable

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Peter Aranyi is the author of Commercial Real Estate Investor’s Guide and Negotiating Real Estate Deals, and editor of several other property investment books including How to Survive and Prosper in a Falling Property Market, The Rascal’s Guide to Real Estate, Property Tax – A New Zealand Investor’s Guide and Property Law – A New Zealand Investor’s Guide. He runs Empower Education. This article is used with permission. You can contact him here.

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24 Comments

Could have been written for Olly!
Good advice -appropriately aimed at the property industry and other tricks.

Interesting article for those that don't get it written by someone that doesn't get it.

pfft, pick a bad house, in a bad area, with bad tenants.  If the average house price doubles you'll still be a winner and will walk away patting yourself on the back for making such wise investment decisions.  

ZZ it seems you directly affected the ROI of your investment and full credit do you for doing so.  My point is basically anyone investing pretty much anywhere in New Zealand could make squillions through absolutely no fault of their own.  Come on, lets not kid ourselves.  Even some idiot politician who isn’t sure about the moon landing made millions.  Here's why! - stats from the RBNZ.  value of NZ housing stock Sep2002 -> 270 billion, Sep2013 -> 708 billion.  That’s a 162% ROI or 14% pa house price inflation including the GFC time period.   Incidentally gold increased from 260 ->1300 USD/Ounce over the same time period, scary.  What’s made you and everyone else who invested in property fabulously wealthy is not wise investment decisions, it monetary easing, Bernanke’s and Yellen’s low interest rates and the reckless QE programs of late.

But-but-but ... I never said I " wanted to be a millionaire by Monday " !!!!
 
... Tuesday lunch-time would do ... no sense in rushing these things ...
 
The Alexander Putin seminar on " How to acquire land and influence people " seems to be a winner .... rich by lunch-time , without rushing ...

Yes agreed, raising interest rates in the global context doesn't make sense.  I don't mean to sound grumpy and annoyed ZZ.  I left NZ in 2002 and I came back after a degree and postdoc only to find everything had turned to custard.  Dollar worthless, housing out of reach and foreign/domestic investors chasing asset prices up.  A heck of a lot has changed since 2002.

Nothing's perfect certainly fat pat - but 3.5% growth possibly higher, low comparitative OECD unemployment etc - where did you come back from - zero growth Europe (which will be likesth at for some years yet) or amnemic grow US..or ?  Point is, not perfect but a lot worse in many many other places, so be careful in listening totally to the half glass empty people who abound here.

dollar worthless? We have (almost) never had the global buying power that we have today.  Buy capital equiptment from overseas and begin capital intensive (not labour intensive) manufacturing for the local market. 
Japan went through a period where their currency sky rocketed (80s?) and they used their yen strength to invest in capital to grow.

Hi Simon Sure the NZD is trading at all time highs and we've lost most of our export trading partners as a result.  I meant fiat currency in general has devalued relative to hard assets.  I've tried to put some accurate numbers to this.  My gold price above was inaccurate.   In September 2002 the price of gold was ($379 USD or $823NDZ @ NZDUSD=0.46) but as of today the price of gold is ($1356USD or $1576 @ NZDUSD=0.86).  That means that the USD has devalued 72% and the NZD has devalued 48% with respect to gold over that short 12 year time period.  Okay so perhaps you think gold is a bubble too, but replace gold with any other hard asset and do the same calculations.    You end up wiht the same result.

"Second, and more important, was the level and quality of investment that persisted through the 1980s. Investment in capital equipment, which averaged more than 11% of GNP during the prewar period, rose to about 20% of GNP during the 1950s and to more than 30% in the late 1960s and 1970s. During the economic boom of the late 1980s, the rate still hovered around 20%. Japanese businesses imported the latest technologies to develop the industrial base. As a latecomer to modernization, Japan was able to avoid some of the trial and error earlier needed by other nations to develop industrial processes. In the 1970s and 1980s, Japan improved its industrial base through technology licensing, patent purchases, and imitation and improvement of foreign inventions. In the 1980s, industry stepped up its research and development, and many firms became famous for their innovations and creativity." - wiki
Note the 1980s were the decade of the extreme property price inflation in japan also that has deflated over last 2 decades.. they survived because they were innovative when they could be

ZZ- I'm not talking about manufacturing furniture etc.  I am talking about high tech, IP heavy stuff that we can licence to the rest of the world, or help get NZ innovation ahead of the pack.  Get the best equiptment now while its cheap and be innovative.  Sir Paul Callaghan had the right idea, watch some of his presentations on youtube and take notes

Simon - you are probably correct on the direction NZ needs to take. And no doubt a few entrepreneurs will do well in the next few years.
 
One of the biggest issues I see for NZ is that many people are still struggling in covering their basic needs so their minds are pre-occupied on those needs e.g. housing.
 
There is a lot of pent up frustration within NZ which will with time explode I'm sure. The thing is, will it explode into new business ideas or directly at the Politicians?
 
 
 
 
 
 
 
 
 
 

My own view is that much of the supposed gains from property has been largely a result of Monetary inflation.
Throw on top of that , the the supply restrictions  as a result of local Bodies and we have huge gains in Real Estate.
This is one of the flaws of inflation targeting....   thinking that the CPI is the only meaningful way to measure the impact of money supply growth....and that if when are in the CPI range all is good...
So if we have 6% broad Money supply growth over, say 10 yr, then real estate prices should mirror that, all else being equal.
In that regard ZZ is right....   money is not a store of value...   ( he calls it toilet paper)
Real Estate has become thye biggest game in town..

Roelof I think you are right but it shouldn't be that way. The Reserve Bank changing interest rates doesn't change the price of clothes. The reason being is that there is fair competition from many manufacturers, importers, a variety of shops big and small. Yet many necessities in NZ competition is restricted or lacking. Residential land being the main one that is discussed here on interest.co.nz. But really there is a whole gamut of monopolies and cartels as Bernard discussed last weekend.
 
What happens when competition is restricted is that the monopoly or cartel gain pricing power they get to push affordability right to limit, extract the maximum amount of their customers income as possible. Even worse is that the Reserve Bank has little control over this segment of the economy -the non tradeable sector has much higher inflation rate. But by increasing interest rates it is the tradeable sector that gets hammered. So this is really bad for equality and for achieving a balanced economy.
 
What to do about it? National are big talkers but small doers hence the recent accusations of crony capitalism. Labour have historically tried to reshuffle the deck chairs with accomadation supplements, tax cuts, WFF etc. They have also tried to add the State as a competitor KiwiBank, KiwiAssure, KiwiPower, KiwiHomes.... There seems to be a Socialist Dream of the government doing everything somewhere behind this thinking.
 
I think this is wrong because it is a confusion of roles. The State should wherever possible be the regulator, the referee, not the player. It avoids confusion and conflict of interest.
 
This might sound like ACT's Laissev Faire utopian dream of removing the government. But it is not, the government is needed to be the regulator, to break up businesses when it gets too big, to regulate it if that is not possible and to provide the infrastructure needed to allow the market to work.
 
What we need is something in between National's cynical crony capitalism, Labour/Greens Socialist Utopia and ACT's let the market run free wet dream.
 
None of this will be sexy, it will require hard work. Taxes will have to pay to improve our 3rd rate infrastructure -particularly transport. LG will need to be forced into allowing more competition into the new residential land market. The Commerce Commission and other Wellington regulators will need to look at regulating or breaking up monopolies, duopolies and cartels. But if NZ made those pragmatic hard decisions we would become a more equal and successful society.

"The State should wherever possible be the regulator, the referee, not the player. It avoids confusion and conflict of interest."
I'll agree with this bit...sort of...ie if possible it shouldnt even be a regulator or referee, pigs might fly on that one though. Though I'll note that Public health provision and even school provision is a great success in outcome and low costs.
I wont agree with this,
"The Reserve Bank changing interest rates doesn't change the price of clothes."
Clothes have dropped in the last 5 years?  I beleve so, maybe because as there is less money in ppls pockets to buy clothes they have had to drop prices to make sales.  So if the RB raises the OCR and hence retail interest rates rise with no more money in ppls wallets some sectors will have to deflate, that is a loss of jobs, profits etc.
regards
 

Brendon,
Money....    is supposed to be a store of value and a unit of account .( to measure comparative value)
If I could counterfiet money what would happen...????
I am smart  so I start buying assets... and I'm happy to be the highest bidder.   I start giving my mates money and they start buying...
It seems that things are booming , people who take my fake money are happy and feel they have great purchasing power...   how long does the party go on..???
You ( Brendon ) intuitively know that this is not a "free lunch"...   You intuitively know that I am basically stealing and appropriating wealth...   You intuitively know that all my "victims" will be poorer for it and that at some point the "game" will be over..
Our monetary system is corrupt and has facilitated the appropriation of wealth to the financial sector , related parties and savy borrowers.
If wages are going up by 3% /yr and Money supply is growing at 6%/yr...  because of the nature of exponential functions over a period of time the different rates of growth diverge, dramatically.... (In real terms peoples standard of living decline)
Before this game ends...  the average NZer that does not own assets....will be poor.
Most of the economic growth over the last 40 yrs have been driven by credit growth..
Under our current monetary system, with inflation targeting, ...it is low interest rates that will make us poor...     sounds counterintuitive, I know...
low interest rates = excessive credit growth ( in a growing economy )
NZ is going thru another credit cycle...  and maybe at the end of this one we will face our own crash...???  
In the meantime....  the planets have all lined up for Auckland Real Estate... and we might be surprised how high prices might go....???
Very, very inequitable and unfair.. ( counterfieting )...and thats' before discussing everything u mention..... I'm just talking about "Money" and our Monetary system and the Global Monetary system.

Roelof I suspect there is something wrong with the whole global monetary and trading systems. Read "Lords of Fiance" by Liaquat Ahamed for a really good biography of the major players who set up our current system. It is really complicated and I'm not sure I'm qualified to say what the answer is.
 
Having said that there is not much we can do about it.
 
I think a lot of the credit growth in NZ is bank generated mortgages where they benefit from a cycle of house and mortgage rises. If you stopped the house prices rises (by getting rid of the supply restraints) you would stop a large part of the credit growth. It is a kind of chicken and egg argument.
 
But it could be the housing market is entering a new phase where foreign money is the major booster of house prices. That local incomes have been tapped out, that the new source of credit is ultimately derived from foreign quantitative easing sources. So I am not opposed to limitations put on immigration and foreign purchases of property.  
 
I think these 'systems' of providing a basic need -housing are inherently unstable because you a pushing people to using their absolute limit of their incomes. There is no give in the system for an economic downturn other than defaults or negative equity. But in places like the UK where this has been a problem for longer the bust is not cathartic. Long term housing affordabilty is not restored. Instead as soon as the economic crisis is over. Housing costs inflate. People are forced into putting as much as their incomes allow into housing and the boom bust cycle continues.
 
So waiting for a bust is not a good policy option. It is better to deflate the bubble by providing competitive alternatives.

Brendon,  yes.. I mostly agree with you....  
Reads a bit like a shakespearian tradgedy...
"So waiting for a bust is not a good policy option. It is better to deflate the bubble by providing competitive alternatives."
What are the odds of this happening..??
  The worst senario would be a huge boom and then the leaders that be finally addressing supply constraints and we have huge new construction...    bubble + over supply = Bad Crash
Are our leaders wise enuf to see all this..????
 

If Key is still in charge when the crash happens the Financial companies will be saved and there will be desperate measures put in place to maintain property values while ordinary kiws will be srewed. 
 
I think if new housing is provided where people want it (not Irish ghost towns miles from anywhere with no infrastructure support) and it is provided in a cost effective competitive manner then we should be safe from an uncontrolled bust. A few developers will go bankrupt. Those holding land expecting to get many hundreds of thousand of dollars from each section. But why should their profits be gauranteed while ordinary hard working kiwis are being screwed?
 
The Christchurch earthquakes should give kiwis an idea of how crisis/disaster politics go.
 
What is more important to Key and Brownlee, rebuilding peoples lives or maintaining property prices? Why did they spend $165 million buying 20% of Christchurch's CBD? The Green frame that is not very green (the parks and cycleways seem to get smaller and more distant in every new blueprint) but is very greedy. Greedy frame it should be called.
 
And if they are so keen on compulsory purchase of land why didn't they do this?
 
“…and to some extent government…” To some extent, Bill!!! YOU, as Government, are the one in tandem with your colleague Gerry Brownlee that oversaw the price increases in land and buildings after the Christchurch earthquake that saw those who had lost everything, or there abouts, have to pay MORE to re-establish their lives. Why? Because to have done otherwise; to have freed up adequate parts of tens of thousands of hectares of land, the masses of it to the north, west and south of Christchurch, would have meant a general drop in New Zealand property prices. YOU, Bill, put the interests of yourself, your colleagues and established property owners above the interest of the displaced. “And to some extent government” Give me a break! Not ‘some’, Bill “To the FULL extent, Bill – The FULL extent” YOU could have done differently, as only a national Government could, but you didn’t. An today we have the mess that is the New Zealand property market. It WILL end badly, Bill. And it could have been all so different. ( as Hugh Pavletich, for one, has beaten himself black and blue in the face for years, trying to tell you) All the tinkering about by you, now, and the RBNZ won’t change where the market is off to. YOU are too late.
 
H/T Janet at Macrobusiness
 
Go to the link to read more from Janet in the comments section it is great stuff.
 
 

How does one get out of a Shakespearian tradgedy? Maybe acknowledging we are in one, instead of believing rock star economy Johnny 'good times' Key....

See here for the Aussie perspective on foreign buying property.

I suppose then what is a reasonable criteria to pick to give you an insight into the state of the critical parts of the economy.
My view on property is,
a) its a bubble that will pop, tulip mania.
b) It is an investment and hence not a cost of living, hence should not be in CPI and not part of the factors that determine the OCR.
To my mind the CPI or core inflation measures or gives you an average "number" across all sectors and regions, in effect its a health indictor that then allows you to set the OCR.
Now the problem I have with this average if we included the housing bubble it drags up the average CPI, hence if we want to keep CPI  below 3% we'd have to get serious deflation in other sectors to get the average we want.
That IMHO would be disasterious, decimation of sectors would in turn collapse our entire economy and burst the property bubble.
Lets say we allow that and property falls back to the 3 to 1 norm, that is a 50% loss of in the property market. 
Can you imagine the impact of that? 10% loses for 5!6 years?  25% for 2 years? 
Impact to un-employment? 
mortgagee sales? 
Govn borrowing costs?  35% aka Greece?
tax take collapse?
Where would the Public money come from if we cant borrow it at <7%?
Tax hikes?
Stopping of OAP and benfits?
No more public funded health services?
riots?
I'd suspect it would be worse than the 1930s Great Depression.
Really Im gob smacked by ppl who want to put the effects of mad speculation into  CPI where it has no place and the impacts it would cause.
regards
 
 
 
 
 
 
 
 

Zz ..... I detect a very distasteful dislike for Mr Wheeler et al from the Reserve Bank of New Zealand ....and for one reason being ...it was his move to increase interest rates,  both now with 25 basis points and further rises in the near future ..... I am picturing you at home pouring over your Excel spread sheet plugging in those interest rates rises and looking at your property portfolio,  as to who will get the next rent rise to cover your interest costs ...not forgetting that the rate of property inflation is more subdued now, which will also bite into your cash flow and gross/net worth projections.
 
I realise that many of your comments are just to  "troll" for a bite from the posters on this site ...but it reveals more to me than that and it tells me you are concerned about this matter, as it actually affects you..... I am both a tenant and an investor, so I keep an eye on both sides of the market ...and regarding your rental increases, good luck with those, as this year we didn't see those queues of would be tenants, waiting for the property manager to turn up for some delapidated, 100 year old villa in Grey Lynn... in fact i am seeing more and more "for rent" signs around .........
 
What makes me laugh with all you "died in the wool" PI's out there is simply the fact that you think everything is working and will always work in your favour ie accomm supplements, WFF, tax breaks etc etc which the taxpayer is subsidising... and in reality this has been the case .... up to now that is.... and when something like this actually happens, you cry out like a spoilt child ...
 
Anyway, every cloud has a silver lining, as at least the savers of this world will be a bit happier :)
 
Have a nice day Zz.

I doubt warrent buffet would consider the NZD as a store of value (he would probably lump it in the same category as bitcoins).  So when the NZD gets so highly valued by speculators it makes sense to convert the NZD's every new zealander owns into value storage or value creation assets.
Assets, being by my definition, things that produce income.  Buy stocks in companies that produce things of value, property by its nature is an asset as it provides shelter that will always have value to humans; it produces rent directly as income and its this rent income that should be used to value property.  Hence why investors would not be buying in auckland and are moving to higher yielding secondary cities where prices are still justified by the level of rent you get from the place.  Happens every cycle. Capital gains from speculation in auckland ends up flowing into secondary cities that have population growth also, no new builds/apartment complexes on the horizon, and whos values are still similar to levels back in 2006/2007