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A sad tale of positive cash flow property

Friday, April 30th 2010, 2:37PM 22 Comments

by Philip Macalister

There is a view that property investing is easy and making money is a given. Well a story today shows how it can all go terribly wrong.

Last year we profiled in the NZ Property Investor Magazine a young man who was doing some amazing things. The guy, Laurence Pope (22), basically bought a street load of houses in the Waikato town of Paeroa as an investment.

He became pretty popular with the locals as he transformed what was referred to by some as a “ghetto” into a much smarter street.


Meanwhile other property investors where pretty impressed with his deeds.

However, things have gone wrong. His parents who acted as guarantors are reportedly in some difficulty and the bank probably hasn’t done too well either.

Bayleys have sold eight of the properties in mortgagee sales to other investors across the region.

The homes sold under the hammer for between $64,000 and $90,000, yet Pope had paid around $120,000 for each of the properties and improved many of them.

It’s sad to see someone who made a difference in a town like this fail, but it also shows some of the risks involved in residential property investing.

On the upside the sale also demonstrates what we talk about in the May issue of NZ Property Investor magazine – that is the return to positive cash flow investing.

The article has a comprehensive table showing readers areas throughout the country where you can find cash flow positive properties. Not surprisingly many of them are in the provincial regions.

According to Bayleys Pope’s Paeroa properties sold on rental yields of seven to 10%. These are well above comparable investments in the likes of Auckland, Wellington or Christchurch, and show that by looking outside the square, there are plenty of excellent investment opportunities available in the residential sector.
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Comments from our readers

On 30 April 2010 at 6:14 pm Jane said:
Gosh, that is sad. What a shame it couldn't have been both a social and a business success. At 22 he has plenty of time to pick up the pieces but is a warning to anyone asked to act as guarantor. The person you are supporting may have the best will in the world but if their business isn't planned right it then it might ruin your retirement plans.

That said, I think I'd rather support the Laurence Pope's of this world than actually put my money into Bridgecorp, Hanover Finance and managed funds.
On 30 April 2010 at 6:33 pm MrB said:
Just goes to show: You can't put an old head on young shoulders.
On 30 April 2010 at 6:36 pm Nancy said:
Cash flow has always been king. It was only in the madness of the 2004-06 boom that many forgot this simple maxim and now are paying the price.
However it is not just absolute yield level that counts but the quality behind that yield.
Pope bought the worst houses in the worst street - a bad strategy.
Buying the worst house is fine but make sure it's in the best street so that once you have done it up it will compare well with the other properties in the street and you achieve improvement in the capital value of your property.

There are many properties with high yield in the provinces but I would rather get a lower yield in a bigger city, with a more stable population and employment outlook and where there is greater certainty of rental growth.
On 30 April 2010 at 7:35 pm Richard said:
I agree with Nancy, give me a lower yield in a bigger city, with a more stable population and employment outlook and where there is greater certainty of rental growth.

Problem with too many investors they don't do their home work, anyone can make money in a boom, but it's having some understanding on how to ride out the bust. Too many of the property advisers out there are not telling the who truth about managing cycles. Pope was always going to be too highly geared. Greed, often overrides commonsense.
On 30 April 2010 at 8:03 pm JD said:
Lesson: never act as guarantor!
On 30 April 2010 at 8:34 pm Jeff said:
I remember reading this article and wondering how he could possibly afford this? Most investors I know hold between 1 and 4 properties and make sure there is sufficient equity to ride a downturn or an increase in interest rates. Positive cashflow is the only way I know (unless you have strong cash reserves) to have a successful long term property portfolio. Speculation is for the already well off, who would not have made this msitake anyway. I am also alarmed (as I was at the time) that NZPI did not offer a caution with this story, which seemed too good to be true even then - and it was.
On 30 April 2010 at 9:00 pm Ben Turner said:
WOW. If the one that sold for $64k had a 10% yield, but he had paid $120K + the cost of a full reno then they must have been returning about 3-4%. Where or who was he getting his investment advice from, if any?
On 30 April 2010 at 9:16 pm jenny said:
It doesn't matter whether you are young or old, people make mistakes- emotion takes over from commonsense. If I had the knowledge earlier that I have now, I would have practically paid each house off before I bought another.
On 30 April 2010 at 11:15 pm Tristan said:
Hindsight is always easy. If we all knew back then what we know now, I'm sure most of us will be very, very wealthy by now.
It's always good to learn (modestly) from other people's mistakes (rather than have to go though it for ourselves).
On 30 April 2010 at 11:59 pm John said:
I hope NZPI puts this story on the cover of there next issue, as they did with the "Angel of Harlem" cover originally on him. Maybe that way a few of these young investors might learn that property is not a straight line to riches, take a step back and learn to crawl before running.
On 1 May 2010 at 5:30 pm John Cooper said:
It took guts to try and do what he did good on him,with everything he would of lernt by now will put him miles ahead. People should respect him for getting of the couch and going hard. Its far easier to do nothing and just poke holes in those who try. I take my hat off to him for trying.
On 3 May 2010 at 3:21 am Jan said:
Why does the end of your article say there are good returns to be made in provincial centres when obviously this young guy started by making good returns in a small town but when the value of his properties dropped he got into financial difficulties. To make real wealth through property you have to buy in areas with a high population and good infrastructure and invest for long term capital growth.
On 3 May 2010 at 9:05 am Glenn Morris said:
The stategy might have worked. He messed up by being under capitalised (like not having reserves to cover a negative swing) (this is easy to see because he needed his parents as garantor) and blowing his own trumpet. I wonder what he did once he had finished the project. I bet he sat back, gave up his day job, and started living the good life. I wonder what his brother (or sister) will be thinking. I wonder if his parents will help him again.
On 3 May 2010 at 9:43 am Heidi said:
MrB Says:
April 30th, 2010 at 6:33 pm
Just goes to show: You can’t put an old head on young shoulders

Well he did have old heads...his parents the guarantors!!! Lesson don't overcommit to your off spring!!!!
On 3 May 2010 at 11:07 am Ken Landeman said:
I dont know of any sucessful property investors that have not gone down a similar track at some point in their career
and perhaps at such a young age, but with the knowledge he has acquired I can see a future sucess story about this guy who went broke at 22 and now is a major player in the property business
On 3 May 2010 at 6:18 pm A W MCDOWELL said:
THE comments were great. there r a lot of people out there that really know there stuff. I lost $500 000 (1/2 a big one) after 20 yrs in the bussiness. DO not go guarantor 4 any one ! There is all ways another answer or way. CASHFLOW HAS 2 B A MUST. NOT A MAYBE OR WE WILL GET THRU. A MUST. IMPERATIVE . HAving been broke after doing ok is hard at any age but a lot of people love 2 give u another kick when u r down. I started as soon as I could and those comments would have helped. As was said, DO YOUR HOMEWORK!
On 3 May 2010 at 11:24 pm Phil H said:
I remember reading that too.
My main concern was he didn't seem to be diversified, all his eggs were in one basket, or street as the case was.
Obviously he was overstretched too.
Amazing the bank/Westpac lent him so much to go and do that.
On 4 May 2010 at 5:40 am Kurt Jacobson said:
What matters now is taking this as a hard lesson learned and using it to get it right the next time. It would be a shame for him to never invest in property again. With a better plan he could do quite well next time and pay back the money lost on this venture. He has time on his side.
On 5 May 2010 at 1:11 pm Jackson said:
Take my hat off to this guy. i am 20 and own 2 with ambitions to own a lot more. i do have guarantors behind me and i have done my homework. i would love to talk with laurance and once we are on a level playing field have a race, first to have a million in their bank wins. with this desire and ambition if you fail once its not the end of the beginning in fact its the opposite. he is much better off now than he was when he started in my opinion, only a fool makes the same mistake twice.
On 16 May 2010 at 5:50 pm Robbie said:
In Response To...
Heidi Says:
May 3rd, 2010 at 9:43 am
MrB Says:
April 30th, 2010 at 6:33 pm
Just goes to show: You can’t put an old head on young shoulders

Well he did have old heads…his parents the guarantors!!! Lesson don’t overcommit to your off spring!!!!

I agree we need to teach them to make their own way...not pay their way!
On 13 June 2010 at 4:33 am chris said:
I remember reading that article in a new plymouth motel room while away on a business trip. Inspirational story that captures the youthful ambition to make a difference and be successful, not bad for someone starting out.
In hindsight it's probably fair to say that this young man determined as he was, to be a little bit of an idealist at heart, but like some have said, it's usually safer to buy up in the major centers as a hedge against lower rents and lack of job prospects.
I have one rental property in otahuhu AUCKLAND and i paid a little more than what laurence paid for his properties but it made financial sense to buy it still because otahuhu sits slap bang between two of the biggest industrial areas in auckland (Penrose and East Tamaki) so even in a recession location is king
On 19 August 2010 at 4:14 pm Michael Law said:
You know I am really sad to hear about this story. I'm 23 years old with my own import and distribution business, after reading his initial story I was bulldozed into the property market.... I thought what inspiration this story gave me.

Over the last year, I still haven't bought, the figures have just never added up. I thought it was because I was more into business and therefore my risk allocation is different. Now I hear this, i'm glad i've stayed out of an area that I clearly do not understand just yet.

I never realised he had parents as gurantor. Explains alot mind you.


Michael
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