wealth creation with real estate investing

Raj Babar migrated to New Zealand at the age of 50 years in April 2003 with $150,000. His plan was to retire with a passive income of $150,000 per annum through real estate investing at the age of 65 years.

He attended several property seminars (free & paid) to understand the property market in New Zealand – to get better grasp of the real estate environment he became a real estate consultant as he felt knowledge was the key to growing rich.

Raj debated whether to buy an investment property or a residential house for his family. Although his investment knowledge and instincts told him to buy an investment property first, he decided to buy a house for his family to provide emotional stability to his wife and children in a new country.

Finance was easy during the period and after purchasing the house with 20% deposit he was left with enough money to pay deposit for an investment property.

Buy for Cash Flow

The first property he purchased was a brand-new leasehold flat in the heart of Auckland CBD that had a ground rent holiday for 7 years. Although he knew capital appreciation on the property will be low as compared to a freehold property, he bought the property for 12% net return ROI. He improved the cash flow to 14% by furnishing the flat with furniture, television, refrigerator and kitchen utensils – he did this in order to improve his position with the banks for future borrowing.

How to Achieve 10% Return on Investment

Raj’s strategy was very simple: his aim was to buy freehold property with a minimum of 10% return … such properties did not exist in Auckland. The rate of return on investment (ROI) for a freehold single family home in Auckland, New Zealand at the time was 5–6%. This was well below his stated goal. So he focused on single family homes that had additional land to construct a second house.

Raj would scout hundreds of property to find a motivated seller who was willing to sell his property at least 10–20% below market value for immediate settlement, which would give an initial return of around 7% on his investment and also give him instant equity. To increase his rate of return, he made cosmetic improvements to the first house and construct a second house on the property without sub-dividing the property. This was because sub-division costs were around $60,000 and this expense would not add to his rate of return. The aim was not to sell the second house but to increase his return on investment.

The rent after construction of second house on the property normally increased his return to over 10%.

Increase Equity

The act of constructing the second house and improvements to the first house increased the valuation of the property by 20%. The fact that he bought the property below market valuation worked in his favor, and subsequent improvements increased his equity in the property by over 30%. He then used the additional equity to pay deposit to buy another investment property. Banks were happy to loan because cash flow from the existing properties added to Raj’s income.

It took Raj around 6 months to complete one project. He repeated the process again and again as it was a winning formula.

Property Management

Once a project was completed, he handed over management of the property to a competent property manager. From then on, it became a hands-off operation with residual cash flowing from it. His only work was to check receipt of rents every month and once in a while give decision on a major maintenance issue. There were times when he did not speak with his property manager for months or even a year. By increasing the return on investment to over 10%, he ensured that the property became not only self-supporting (pay for the all its expenses, mortgage and management costs,) but also gave him a small residual cash flow every week.

There are people who try and manage properties themselves and then cry foul about the headache of managing tenants. This is not residual or retirement income; Raj paid his property managers 6% of the gross rental but this is an expense. In effect he paid them only 4% because of tax rebate.

Vacancy rates on his investment houses were much lower as compared to when he was managing his properties. He calculated that if his property manager could reduce vacancy by one week in a year, then there was zero cost of management. By appointing competent property managers several properties owned by Raj have not had one day of vacancy in over 7 years.

Finding a good property manager made Raj’s income stream residual. Every property manager is not equal but with some experience, proper research and interviewing you can find property managers who will take all the headaches of property management from you—which is true for any business!

Tax Savings

As a result of his property investment, Raj did not pay a single dollar tax on his income for the first 12 years. In later years, he was getting tax rebates to the tune of $35,000 per year. He used this money to fund additional property purchases.

Raj treats each property as a separate business center and an independent source of residual income stream. He repeated this simple formula several times over.

Change Strategy

After years of successfully following this strategy, Raj had to change tack because of increase in Council fees and construction prices; nothing lasts forever. But for as long as it lasted, he managed to buy several properties that gave him residual income.

Raj then worked on a new strategy of finding large houses in key locations that could be converted into room by room rentals for young professionals. This provided him with even larger cash flows.

Using strategies outlined above, Raj bought $8.0 million worth of properties and built equity of $3.0m. He had built substantial residual income but it did not match up to his goal of $150,000 p.a. to retire. This was because of his liabilities of monthly mortgage payments and outgoings.

Commercial Property Investment

As part of his final strategy to retire, Raj sold all his residential investment properties and used the proceeds to buy unencumbered commercial properties worth $3.0 million giving 8% net return. The advantage of investing in commercial properties is that tenant pays all outgoings such as rates, insurance, body corporate fees and even the property management fees: he now has no borrowings and can enjoy his retirement in peace.

The story that I narrate is not work of fiction but based on true life story. This is just one example of how to retire using real estate investing. It took Raj 12 years to retire after buying his first investment property. If you can build either equity or cash flow from your investment properties you can retire using various strategies.