Flawed strategy from commentator

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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.

Tuesday, December 4th 2012, 12:00AM 2 Comments

by The Landlord

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.

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