Property investing is an enduring love affair for a lot of New Zealanders; even the recent turmoil in the market hasn’t broken the bricks-and-mortar bond. Now, lower interest rates and more affordable house prices are prompting many people to consider buying their first investment properties, or expanding their portfolios, but it isn’t always a straightforward process.
Andrew King, the vice-president of the New Zealand Property Investors’ Federation tells us the first thing new investors should do is work out what they want from an investment property. “From this you can develop a plan of what you want and how you are going to achieve it.” It might be that you want to provide a bit of extra income for your retirement, or to build up your portfolio to become financially independent within a certain number of years. Work out what you want and how you are going to achieve it.
Unlike a house bought to live in, emotion should not play a part in the purchasing decision. It is often said that in property, money is made when you buy. Make sure the property you are considering stacks up well on paper and is a good purchase. King says: “Create equity. Add value when you purchase, buy below market value or a combination of both. By adding value you make an instant return, enhance your borrowing capacity and reduce your risk.”
An investment in property generally returns an income (the rent) and experiences growth (when house prices go up). There are also tax advantages that go with investment: if the property is negatively geared, that is, the income from the rent does not cover the cost of the interest on the loan, losses can be claimed against the owner’s other taxable income – often resulting in a tax refund at the end of the year.
Over time most properties end up being positively geared; when there is a surplus of rent over the property’s running costs, because rent rises with inflation, while the cost of servicing the interest on the loan remains the same, or decreases.
A property that has its outgoings covered by rent and tax benefits is a safer buy than one that requires a large monthly top-up of the mortgage. Property tends to be a long-term investment, and people lose money when they are forced to sell during depressed markets. Consider what would happen if you lost your job in six months: would the investment still be such a good opportunity? Make sure there is enough leeway in your budget to manage such scenarios.
In calculations, make sure you allow for several weeks a year in which the property is not tenanted. Consider the property’s resale value: If you had to sell quickly, would you be able to find a buyer?
King recommends working out the yield of the property, by dividing the annual income from the property by its purchase price. This formula doesn’t take into account the maintenance, loan costs, or any management issues, but is a rough and ready way to compare one property to another. But he says higher-yielding properties aren’t always the best bet. “Watch your cash flow: High yielding property doesn’t necessarily provide the best cash flow. Proportionally higher expenses, plus higher risk of damage and rent arrears, can turn a high yielding property into a poor cash flow property.”
He says NZ property investors should not be in a hurry to buy. “Be patient. Don’t rush into a property purchase, take your time to get the right property on your terms. Plan to own the property for the long term, as property is a long-term investment strategy. You usually make more money over time than selling for a quick profit.”
When evaluating a property for an investment, it can be helpful to have in mind the type of tenants you want to attract. For example, if you would like a professional couple, you might look for a low-maintenance property with lots of space for entertaining. To attract a family who could be long-term renters, you might look for a tidy house in good school zones, with a garden and three or four bedrooms.
When you are looking at properties, take note of the construction materials as well as the overall condition of the house. Character homes are appealing but can require a lot of maintenance. Opt for properties that will be easy to keep in good condition. Look for other aspects that appeal to tenants, such as good insulation, heating and lack of moisture.
If you’re considering an apartment as an investment, find out about the body corporate levies, the chances of them changing, and how the body corporate has been operating. Have there been any issues with the apartment block? Find out how easy other apartments within the block have been to rent.
New property investors should learn from others’ mistakes. Join a local property investors association, get books out of the library, or subscribe to a magazine such as NZ Property. King says: “Get good advice. Talk to friends who invest in property. Get a good accountant, lawyer and mortgage broker. The best way to get impartial and honest advice, plus meet hundreds of real investors, is to join your local property investors’ association. See NZPIF.org.nz for contact details. Web forums such as PropertyTalk.co.nz are another excellent source of information. Be selective in going to seminars as there are a lot of sharks out there.”
Be wary of people who are trying to sell you anything: work out whether you would be better off doing the work making the investment yourself. If someone approaches you about an opportunity, it should set off alarm bells: If it were such a good proposition, people would be going to them; they would not need to sell it. Make sure you understand salespeople’s motivation.
First-time property investors often choose to buy locally. Investing within your own neighbourhood means you are more likely to know whether the property is a good buy. If you are purchasing elsewhere, a house might look like good value compared to your area, but could be overpriced for its own patch. A property nearby is also easier to keep an eye on; driving past once every few weeks will help you keep on top of any issues before they become a problem. Choose to buy in areas with good growth potential, and where infrastructure developments will make houses more desirable in the long term.
King says: “Know your market. Choose just a couple of areas to buy in, rather than a scatter gun approach, and get to know them well including the tenant population, rental demand, rental prices, house prices and local economy. It saves time looking, you reduce the risk of mistakes and feel more confident.”
Even if you plan on hiring a property manager to deal with the rental property, make sure you are well versed in the law. The penalties of not complying with the Residential Tenancies Act can be severe, and you should be able to determine whether your property manager is doing the job properly. It’s even more vital if you plan to manage your own property.
Even if you only own one property, make sure you operate in a business-like fashion. Get the right business structures in place, keep good records and be aware of tax liabilities – if you are a trader rather than a long-term investor, your profits will be liable for tax. King says: “Be knowledgeable. You are the CEO of your property business. Learn to be a strategist, financial controller, marketing executive, maintenance manager, customer relations expert and property manager. Again, check out your local property investors’ association, read books, magazines, newspapers and property forums.”
King says investors should keep up with all changes in the property investing environment. “The rental market, housing market, interest rates and business environment are constantly changing. Keep up with the changes to ensure you are maximising your potential and planning for potential risks, especially interest rate changes.”