Property investor information
Investing in Rental Property… a powerful way to build assets and wealth
If you are looking for help and advice on rental property, you have come to the right person.
Over the years Frank has specialised in financing people into rental properties. He has conducted property investment seminars in conjunction with 3 different Real Estate companies throughout the Wellington region along with specialist property advisers such as Accountants Solicitors and property managers.
Not only has Frank financed many investors into property, he has also gone out into the market with them and helped them find suitable property thereby acquiring a good knowledge of the Wellington property market. During this time Frank has also bought and renovated his own rental property.
So if you are considering investing in property for the first time or are an experienced investor considering your next move please contact Frank here for advice and information.
There are too many aspects of property investment to consider and discuss on one page so we will limit it to the 7 most important things that people should consider when buying property.
Question: You would always get a builders report when buying an older home, right?
You wouldn’t buy a leaky home would you?
Quality is one major aspect of ensuring that you have an asset that is rentable and easy to sell when you need to.
I always recommend renovated or new property because they have
• Low or no maintenance
• Premium rents. Tenants will pay $50-100 per week more for a nice place to live
• Less tenant issues
• Maximum depreciation claim on chattels.
• Growth potential based on replacement costs.
Location. All property owners and investors understand the importance of location. Proximity to the city and hospitals, university and other major employers are demand areas for tenants.
If you own a quality property in a great location that people want to rent, you will have a property that other people will want, and it will be relatively easy to sell when the time comes. This provides you with a high level of security.
Therefore, my target area is to invest is within one or two 2 suburbs from the CBD.
In Wellington, this means suburbs such as Te Aro, Mt Cook, Newtown, Kelburn, Thorndon, Wadestown and Mt Victoria.
I show people that the top of the market property is just as affordable as the bottom end where traditionally property investors have looked for property.
Contact us now for info on quality property options.
Can we expect growth in the future?
Let’s look at the factors that contribute to growth.
Firstly: Land scarcity. Where there is a shortage of land, there will always be pressure on land values.
Secondly; Population growth: this is a major contributing factor to the increase in property values. If you have a shrinking population, there will be an oversupply of housing, weaker demand and flat or negative property prices.
In contrast if there is population growth, this creates an under supply of housing, greater demand and increase in prices, especially where there is already a shortage of land.
In the major metropolitan areas in NZ there is expectation of population increases over the next 20 years. Investing in these areas would be wise for people wanting capital growth as all the ingredients for growth are present.
Proximity. This is a very important factor as certain parts of any town are always in more demand than others and grow at a better rate. Walking distance to the city centre is always a contributing factor.
Traditionally property has doubled in value every 10-15 years. However, it does not go up at an even rate year by year. Traditionally, property will have nil growth or even negative growth for 5-7 years and rapid growth over the next 5-7 years.
This was exactly the case in Wellington from 2009-2015. Property prices were stagnant in this time, but then took off the years from 2015-2019.
So is now a good time to buy?
Prices will probably never be cheaper and will keep rising over time.
Interest rates are still low and the outlook is for that to continue for the medium term.
Contact us today to enquire regarding finance for property investment.
3. Personal Control
Buy property on your own if at all possible rather than jointly with other people.
This makes it much less complicated and leaves you in control and
- This is your property.
- You decide if you want to manage it yourself.
- You decide whether to appoint or change a manager.
- Choose the tenants yourself if you wish to.
- Live it yourself if you choose to.
- Renovate when and if you choose to.
- Sell when you want to (not when others may want out)
If you choose to buy something with limited control, for example with a body corporate or serviced apartments, make sure that there is a trade off.
There needs to be higher yields, better cash flow or greater potential for growth.
Property should be considered on balance.
The main things to consider when buying a property are;
- Location and Rental Demand
- Attracting and keeping good tenants.
- Yield and Cash Flow
If all of these things are satisfied, I am happy with a 7-7.5% Gross Yield.
Why? Around 7% is the average interest rate over a 10 year period
A gross yield of 7.5% will cover your average interest costs and probably the fixed costs of rates and insurance.
When interest rates are low, there is enough left over to bank some against future interest rate increases.
Using Gross yield to determine purchase price
A quick and simple method to work out how much you should pay for a rental property is as follows.
Take the annual rent and multiply it by 14 times for a 7% return.
For example, if the rent is $500 per week, this equates to $26,000 annual rent. Multiply $26,000 by 14 times and you would pay $364,000 for the property. If you were happy with a 6% return, multiply the annual rent by 16 times. This means that you would pay $416,000 for the same property.
The amount that you are prepared to pay, and the yield that you are looking for will be determined by current interest rates, the location and condition of the property etc.
Always remember the two main considerations are
- Rental Demand
Yield versus cash flow
Too many investors get caught up with the yield of a property. They are better to focus on cash flow.
Let me explain.
The gross yield of one property may be better than another. However, if there are vacancies and maintenance costs on the first property, this could detract from the overall viability of the property and make it worse than the one that had a lower gross yield.
We do a cash flow analysis on each property taking into consideration factors such as,
Vacancy, interest, costs such as rates, insurance, property management, body corp fess, repairs and maintenance etc. We then allow for chattels depreciation and tax rates to show how the property will perform before and after tax.
5. Tax effectiveness
Tax must also be looked at on balance, but who wants to pay too much tax?.
Make sure that you sit down with a specialist property tax consultant and ensure that your structure is correct prior to buying a property.
There have been a lot of changes in the last few years and a good property accountant is more important now than ever.
I am not a tax specialist but I know enough to see where some-one could get better advice.
Recently I pointed something out to one of my clients that his Accountant hadn’t seen. When this was reviewed and corrected the client ended up with a tax benefit of over $20k pa.
Contact me today for a referral to a very good property tax specialist.
6. Cost versus Valuation
Some people are always looking for immediate equity in a property.
So in other words they look to buy a property for less than its market value.
If you are prepared to undertake renovations to property, you can often buy well and build in equity through the renovation.
If you are lucky and buy from a distressed vendor, you can also find undervalued property.
I am not too concerned with this for the average property investor, as I like to take a long term approach, and believe that equity is achieved as property increases in value over time.
7. Exit Strategy
Start with the end in mind.
There is an old saying in real estate that is not well enough known.
It goes like this “Very often people make their money on property when they buy, not when they sell.”
This is very true,
If you buy a good quality property, in good rental demand locations, when the time comes to sell someone will want to buy the property for the same reasons that you did.
Buy well and hold it for the long term.
Over the last several years I have specialised with working with property investors. I have included below a few case studies to provide sample of the some of the benefits that I have provided to some clients.