Advice about starting small and then expanding your portfolio

While he works hard every day in Barfoot &Thompson’s IT department, behind the scenes Anil Anna, IT Manager has built up a strong property investment portfolio that will allow him to retire early. There are a lot of ways to approach securing investment properties and Anil has found a formula that has not only worked but brought him great success and financial stability. We sat down with him to talk about his journey of purchasing properties over time and asked for advice for those considering doing the same.

How have things changed since the GFC (Global Financial Crisis) with regard to mortgage rates?
Interest rates, since the GFC, have dropped steadily. Between 2014 - 2016 they increased by about 1%. While the OCR has some influence on the interest rates, it does not alone decide the interest rate that a bank will offer a borrower. The bank will assess their cost of borrowing either from depositors locally or they may borrow from overseas. I recall paying as much as 9.5% early on. However, I was told at that time that it was very cheap, I knew of some people who had paid up to 18%.

When did you purchase your first property?
In 2007, I bought my first property with $25,000 in personal savings. Although it was not until the end of 2011 that I considered expanding my portfolio. I now have six properties in total, all located within Central Auckland.

Why do you invest in property?
I have always wanted to achieve financial freedom (my definition of retirement) and I have a goal of retiring by the time I am 45. I see property as a great way to build wealth, especially in Auckland where the value (at least for my properties) has doubled every seven to ten years. 

Which one has been the most successful investment, and what made it successful?
In 2016, I bought a three-bedroom property in Mt Wellington that was lingering on the market because it had no CCC (Code Compliance Certificate). For this reason, people were staying away from it and no offers were being made. I did some digging and found out the reason a CCC was not in place was because a $98 license fee was unpaid. I approached the owner and said, I would help him remedy the problem if he would sell the property to me for a good price once it was sorted. He enthusiastically agreed and it became mine. I invested $60,000 more, to add an additional bedroom and $15,000 to $20,000 in landscaping and decking. After the improvements were completed, I had it revalued. The value rose from $727,000 to $950,000 in just six months. I refinanced my mortgage and got a great deal. This was one of my better results because of the almost $200,000 valuation increase in such a short period of time.

Do you have a specific philosophy for property investment or investment overall that you follow?
My approach has always been to buy and hold onto a property and not to immediately flip them. Location is always my initial point of focus. In my opinion, properties will increase in value over time no matter what the market is doing if it is in the right location. I won’t buy anything that is out of Central Auckland or that has more than 2-3 bedrooms as they seem to have the most appeal to renters. I believe my vacancy rates have never exceeded more than two weeks due to these factors. 

What else do you look for in a property?
I want one where the value of the land is higher than that of the structure or building. I also look at the potential to renovate and to add bedrooms. I never buy new properties as often the house value versus the land value is not of interest to me. 

Do you use a property manager for all of your investments?
I did not with my first property and I learned a great deal from that. I realised what a burden it was and how hard it is to stay on top of everything. I now use a property manager for all of my homes and have never regretted the decision. Using a manager allows me to focus on future investing and not day-to-day troubleshooting.  

What are some of the important lessons you have learned during your property investment journey?
People make some assumptions that just aren’t true. For instance, they assume that banks will not lend to you if you don’t have two incomes as a couple. My wife has never worked and that did not impede our financing. Starting small is the way to begin, as you figure out processes and challenges. Every time I have purchased a property, I have put in a new kitchen, bathroom and ensure that heating and ventilation are in place. As a tenant, I have always thought it would be nice to have these things in a property that I rented. I was doing all of this as soon as I purchased a property. I take very seriously my obligation as an owner, to provide a safe and warm place for people to live.

As a landlord how are you ensuring that you keep updated and compliant with the changing legislation/standards, such as the healthy home standards, etc?
Healthy Homes does not figure in my initial assessment of a home but I make sure that it is total compliant before a tenant moves in. As part of my budget, I plan ahead to cover the cost of ventilation, heat pumps and insulation. While it can vary, I usually set aside at least $5,000 to get any property up to standard. After the installation I then usually only have to top up insulation further down the road.

How do you calculate how much you can or should borrow?
There are lots of free online calculators available that are great for answering this question. Personally, I keep a spreadsheet that I update every three months, outlining the value, rental income and expenses of each property. I also keep track of my personal income and family expenses on a separate sheet. I figure out how much money is left after everything is covered and then I talk to my broker about how much I could borrow.

What are some common mistakes people make when thinking about a mortgage?
People think that because the interest rates are low, it will be easy to borrow money from a bank. However, banks calculate the servicing of the loan on a different rate to the interest rate that you were offered. Banks offer two types of loans – interest only and principal and interest. When the servicing (your ability to pay the money back to the bank) is calculated, they assess your ability to pay based upon repaying the principal and interest over the 30 year period or less, depending on your situation.

How have you been able to buy so many properties?
I have built a strategy that works for me and my family of first, buying a property in a good location, increasing the value via improvements and then releasing the equity to purchase the next one. When people ask me what a good rental yield looks like I tell them anything above what you borrow becomes positive cashflow. Anything above 3% in today’s market is good and the property will increase in value over time.

Barfoot & Thompson does not assume any responsibility for giving legal or other professional advice and disclaims any liability arising from the use of the information. If you require legal or other expert advice you should seek assistance from a professional adviser.