Common Myths of Property Investment

Being an avid property investor, I've struggled to understand why I encounter so many people who have enough equity in their family home, but haven't bought a rental property. To me it seems like wasted opportunity that makes little sense, but once I started paying attention to peoples reasoning, I noticed five common misconceptions that can hold people back, and I aim to dispel those myths in simple terms below...


1) "It’s too expensive" - We’ve all seen property prices increasing year on year, to the point it seems unaffordable to own more than one home. It is true that saving for a 20% deposit on your first house can be extremely difficult, but once you’re on the property ladder, it gets a whole lot easier, because that’s when your existing property starts to build your next deposit.

For example, New Zealand house prices have risen 35% in the last five years. A first home bought in 2010 for $350,000 would now be worth $472,000, meaning the owner would have the equivalent of a $122,000 deposit for house number two, without saving a cent.

2) "You only average 6% return on investment (ROI)" - While it is true that property prices have averaged a 6% per annum gain in the last 25 years, this is not an accurate reflection of ROI, because a sensible property investor would use the bank’s money, rather than her own.

For example, a $500,000 house increasing in value by $30,000 is a 6% gain, but if you borrowed 80% of the house value, you’ve actually grossed $30,000 from a $100,000 investment, or 30% ROI. 

3) "The aim is to pay off your debt" - Many people look at a 30 year mortgage as a huge interest cost, but a savvy investor knows that the ROI is usually much greater than the interest rate, so more debt equals more profit.

For example, the aforementioned $530,000 house with a $400,000 mortgage at 7% interest would cost $28,000 per year, but after rental income the net cost is reduced to $4,000 per year (1%). This leaves an actual ROI of $26,000 from the $104,000 invested (25% Net ROI). 

4) "It’s all about getting high rents" - Chasing high rent is not the way to build your wealth. It helps, sure, but not if it’s at the expense of  capital growth (the increase in your property’s value).

For example - A $450,000 house that costs $50 per week but increases in value by 6%pa, is a far better long term investment than an apartment that earns you $50 per week rent , but only increases in value by 3%pa. Here are the numbers after 10 years...

House profit = $356,000 growth - $26,000 costs = $330,000
Apartment profit = $155,000 growth + $26,000 = $181,000

5) "It’s the wrong time to buy" - Nobody can accurately predict what the property market will do in the short term, but it doesn’t actually matter. Property investment is a long term game, and history suggests that over the long term, property prices will reliably increase.

For example - If you buy a property today that is worth $10% less tomorrow, you are unlikely to notice any real change, provided you hold onto the property until prices increase again. When the house is worth twice as much in 10 years, you’ll be glad you did.

Top 10 Tips - Make More Profit From Your Rental Property

1. Downsize your section - It's about quality, not quantity... Invest in a good neighborhood and house, and don't go too large. The rate of return on large backyards is usually far less favorable.

2. Use hard wearing materials - minimise maintenance costs by choosing building materials that last.

3. Cater for the area - Different locations will attract different types of tenants, so consider who you're trying to satisfy then design a rental property to suit.

4. Depreciate your chattels - While changes to New Zealand law mean you can no longer claim tax deductions on your house depreciation, you can still claim for your chattels like drapes, ovens and heat pumps.

5. Masterbuilders Guarantee - Protect yourself from unexpected costs, with a 10 year materials & workmanship guarantee.

6. Don't over capitalise - Smaller and cheaper houses often provide a better percentage return (yield) than more expensive ones.

7. Avoid the extras - Additional chattels like waste disposals won't command more rent, but they will cost you money if they break.

8. Landscape appropriately - Use hardy plants that require little maintenance, and if your section is small enough, courtyards are better than lawns.

9. Don't get emotional - Although it can be fun building your own rental property, remind yourself you won't be living there. Build a house that gives you the best financial return, period.

10. Leverage your finance - Debt is not a dirty word. Making profit from the banks money can be very smart. Consult with a financial advisor about your person circumstances and ask how you can use your existing equity to build a bigger property port-folio.

Building New versus Buying Old

The New Zealand tax system is a complicated beast. Even your accountant will only know a fraction of what it entails. Fortunately, there are industry specialists out there who are happy to share their knowledge of the property rules, and there are some highly profitable tricks of the trade to be taken advantage of.

Our friends at OPES Partners specialise in property investment financial advice, and were kind enough to share this great example of why building a new rental property can be more affordable the an older house of the same price.

"At OPES we focus on quality investment properties, which is typically achieved through new or near new properties. Generally these types of properties have less risk associated with them, due to lower maintenance and less vacancy. In addition, cashflow is often far better once tax has been taken into account."

Below is a cashflow example for two properties, one old with a higher rent, but slightly higher vacancy and maintenance, compared to a new property.

	Older Property	New Property
Purchase price	$450,000	$450,000
Investment mortgage	$453,500	$453,500
Rental income	$550 per week	$500 per week
Vacancy	7.50%	5.00%
Interest at 6%	$27,210	$27,210
Property management at 7.50%	$1,984	$1,853
Rates	$2,200	$2,200
Insurance	$1,100	$1,100
Maintenance	$1,000	$500
Accounting	$1,000	$1,000
Chattel value	$10,000	$49,500
Cost per week (after tax credit)*	$93	$55

OPES Partners provide personal property investment advice, free of charge for qualifying applicants. Read their past client's testimonials, and find out more about their service at www.opespartners.co.nz

Renting - The Smart Financial Twist

If you grew up in New Zealand, you’ve probably been sold the dream of owning your own home. There is something romantic about owning the house you live in, but for some forward-thinking Kiwi investors, the financial advantages of renting are too much to pass up. The fact is, more often than not, if growing your wealth is a priority, paying rent while you own rental properties elsewhere is the smart financial model.

Let’s explore the main advantages:

It’s a purchase made with your head. You are one of two types of property purchaser. You are either one that bases your decisions on emotion, or you want to make the smartest financial decision. This generally puts property into one of two categories; the emotionally satisfying owner-occupied, or the financially satisfying rental.

Renting provides flexibility, allowing you to move more freely, without the burden of real estate fees at every turn. Our personal circumstances change constantly; as does our housing requirements. You can be a tenant in whichever place suits you at the time, while you’ve got tenants of your own, paying off the mortgage in your rental investment.

There are significant tax savings. If you own rental property, the IRD will allow you to deduct expenses from your rental income, which you otherwise couldn’t, if you occupied the house yourself. Rates, insurance and repairs are all legitimate expenses which will minimise your income tax payments, but there are some real doozies like interest payments and depreciation on chattels, for those who get the right financial advice.

It’s important to understand that everyone’s personal tax situation can be different, so we recommend speaking to your accountant before you make any final decisions. There are even some organisations that will offer this advice for free, like OPES Partners in Christchurch.

So, if you want to make a smart financial investment, while maintaining your flexibility and reducing your tax payments, renting the house you live in could be just the right thing for you.

Retirement is a daunting prospect

Remember a time when you would dream of winning a million dollars at Lotto, and thinking of all the things you could do with that amount of cash? Well, the reason we have the big Powerball prizes now
is because one million dollars; that's seven figures, ain't a lot of money anymore. In fact, if you have $1,000,000 at age 65, you've got just enough to live out the rest of your days comfortably. Any less and you'll be going without some things you are currently quite accustomed to.

I dropped out of school early, and have never had a high paying job, but I do have a high paying hobby. I had my first property investment at age 19, and I've thoroughly loved buying, selling and building houses ever since. Fortunately, this hobby of mine means that now, at age 30, I'm looking forward to retiring a little early!

It's not too late for you. Well, it might be if you've already retired, but if you've got a productive 10 years left in you, I'm going to explain a simple formula that literally thousands of people on modest incomes are using to secure a happy retirement in their future.

If you want a safe and reliable 10 year plan to retirement, through owning property in, stay tuned. We'll also be providing the same information on our Facebook and Twitter accounts:

https://www.facebook.com/christchurchpropertyinvestment
https://twitter.com/ChchProprtyClub


Sincerely

Christchurch Property Investors Club