As the value in their family home increases over the years, many Kiwis consider actively using the equity in their home, and other resources, to finance the purchase of a rental property to provide income and capital growth. Here are my five golden rules for new would-be property investors.
Buy well to start with
The two key elements to buying well, not surprisingly, relate to value. Specifically, buying below market value and buying in suburbs that will appreciate in value greater than others. One method is to search for distressed sales, deceased estates, mortgagee sales, etc, wherever they are. The problem with this wide angle approach is you might be buying in some suburbs that you aren’t fully familiar with, and you could end up buying blind. A better tactic is to first select a number of suburbs that you consider are candidates for rapid capital appreciation. Once you have identified these target suburbs, you can start looking for comparative bargains within them. Don’t necessarily just look for mortgagee sales and the like, there are too few of them and too many ambulance chaser investors following them. A bargain might well be a run-down villa in a city fringe next to a small factory. Will it always look like this or is the area ripe for redevelopment and likely to appeal to professional couples in the near future? You will still need to negotiate a good price and be prepared to walk away if you don’t get one. However, because you are focused on a tighter area, you will acquire local knowledge and expertise that will enable you to spot a good deal when you see one, and put forward a persuasive offer.
Focus on value appreciation
Don’t get obsessed searching for cash positive deals (where the rent covers the cost of the loan and other outgoings). Of course it is important that you are aware of the component costs of your investment – interest, rates, property managers, maintenance, etc – and that you can service them, however the only game in town is capital growth. A $500,000 property with a rental shortfall of $5,000 per year over 10 years might seem costly. But if it achieves a compound growth of 10% per annum and you sell it for $1.3m, it’s a far better investment than a property that has earned you a $5,000 surplus each year but only appreciates by 2% per annum and sells for $609,000 after 10 years.
Before you buy, think about selling
What are the factors that will attract buyer interest when it comes time to sell? Is there something special about a property that will make it stand out and positively differentiate it from other homes; a secluded position, sunny living areas, good schools, access to the CBD, shopping and motorways? Better still, is there something that prospective buyers might fall in love with; a sea view, a spectacular city skyline, an established garden, walking access to beaches, parks and reserves? Bear in mind that the same features that attract buyers and high offers also attract tenants and premium rental prices.
The problem with auctions is that they are unconditional, so you have to do due diligence investigations in advance and with absolutely no guarantee that you will be the successful bidder. That involves expense and every expense reduces your potential deposit, increases the cost of the property and eats into your potential gain. If you bid at five auctions before you manage to buy the right property at the right price (quite likely) then you will have commissioned five building inspections and five market valuations costing you about $5,000. That’s great news for valuers and building inspectors, but terrible news for property investors. An investor’s preference should be to buy by negotiation (or asking price), where a price is agreed upon after a process of offer and counter offer. No due diligence costs need to be incurred until an acceptable price has been struck.
Ask the “what if” questions
Finally, consider your position if things change. What if interest rates increase significantly? Will I still be able to service the debt? What if I need to sell quickly after only a year and make little or no gain? How much will my foray into property investment potentially have cost me, including real estate agent fees to sell? What if I get troublesome tenants and am faced with rental disputes or late payments? Can I cope financially if the demand for rental homes changes and the house is unoccupied for an extended period? If your answers are positive, then property investment deserves some serious consideration.
Looking to invest?
Our dedicated residential property investment team are here to help you. Find out more and get in touch with us here. This article is intended as a general discussion only. BNZ recommends the recipient get independent advice. The views expressed are the writer’s own and do not necessarily represent those of BNZ or its related entities.