KEY POINTS:
A fierce battle has broken out between new-age residential property investors and the old guard, with predictions that swathes of investors will be "dog tucker" when the property cycle turns.
The knives-out discussion on the forum PropertyTalk.com had attracted 1397 postings when I last checked, though it only becomes heated on page 45 of more than 140 pages.
The factions are being led by two well-known investors: on the new-age side, Ron Hoy Fong, owner of the Tofu Shop, author and seminar presenter for Richmastery; and, representing the old guard, veteran property investor and author Olly Newland.
Until the latest boom, property investors in New Zealand tended to take a conservative approach. But since the turn of the 21st century, a wealth of information from local and American investment gurus such as Dolf de Roos, Russ Whitney, Phil Jones and Robert R Burley about more aggressive investing styles has become available and tens of thousands of investors have embraced the idea of trying to get rich quick.
New-age investors' strategies often involve buying property "wholesale" - meaning below valuation - revaluing, extracting capital to buy the next property and so on. Because the properties are often negatively geared, investors are encouraged to have alternative forms of cashflow such as businesses and network marketing to meet the shortfall.
Trading has become a popular strategy among new-age investors to build up cash. It usually involves quick flicks or using techniques such as lease options and sandwich lease options - effectively rent-to-buy schemes.
The new-agers say that if an investor can identify high capital growth property, and has the money to fund any shortfalls, then he or she should buy.
On the other hand, Newland, the author of the book The Day The Bubble Bursts, questions whether anyone should be buying property "if we are going 'into a slump' rather than waiting until the right time, which is the bottom of a slump". Investors with a lot of debt, he says, should be strengthening their portfolios and selling off the rubbish properties.
Many of the conservative investors have sold a few properties, leaving them in a position to adopt what Hoy Fong calls "a vulture fund strategy" - grabbing bargains when failed investors are forced to bail out.
One particular aspect of Hoy Fong's postings that seems to have upset more conservative investors is his use of revolving credit to make up the shortfall in mortgage payments on his negatively geared properties. Each side has taken swipes at the other and moderators have had to step in to remove some of the more colourful accusations.
Newland predicts his opponent will be "dog tucker within three years" and attacks Hoy Fong for his relationship with Richmastery.
Hoy Fong replies: "So whose advice to listen to: The combined new age strategies of Richmastery, Global Business Ideas, Hybrid Property Consultant, Acumen, Brad Sugars, Steve McKnight, and all the above have written books as well."
He's quick to criticise Newland's book, which predicts the burst of the property bubble. "[Newland] was 40 per cent too early when calling the day the bubble burst, because property prices just kept on going up, up, up, up. If people heeded his gypsied advice, fortunes would have been lost."
One of Newland's arguments is that he has been through more than one cycle, has experienced having the bank call in loans, and has lost his shirt and come back.
Investors in Newland's camp point out that average yields on investment properties are several percentage points below fixed interest rates on mortgages, which are sitting at 9.2 per cent to 9.4 per cent for two- and three-year loans.
As a result, new-age investors have to fund the difference out of their own pockets. If, says Newland, something unexpected happens, such as the loss of a job, new-age investors could find their houses of cards collapsing quickly when they can't afford to top up the mortgages.
Newland, who bills himself as an independent property consultant, took exception to Hoy Fong's method of calculating profit. "Silly me, [Hoy Fong] calculates 'profit' by taking capital gain and deducting the cash losses and thus has a 'surplus' on paper. From now on you can pay your bills, not with cash, but by sending in some bricks or boards or a little piece of carpet."
Other so-called old guard investors contacted by The Business also question whether their new-age cousins will survive a downturn. Hamilton-based Win Kerry, foundation member of the Waikato Property Investors Association, has built up his property portfolio over 40 years, owns 300 flats and houses and has a debt-to-equity ratio of 50 per cent.
Kerry believes that investors with 90 per cent or more debt could find the banks calling in their mortgages if values drop by even 10 per cent.
Like Newland, Kerry has a war chest to start buying when, as he believes will happen, some of the new-age investors find themselves needing to bail out in a hurry. Old guard investors may still buy negatively geared property if they see potential in it. But when the dark clouds gather, they reduce the debt, increase equity and sit tight until they are in a position to buy cashflow-positive property.
Who is right will only come out in the wash as we go through the next downturn. The property cycle will decide.
* Diana Clement is an Auckland-based personal finance and investment writer.
* To follow the discussion, go to propertytalk.com/forum and follow the links to "New Zealand", then "General (NZ)".
