Still good money in real estate

Is there still money to be made in real estate? The answer to that question isn’t simple – not even the best economists can predict with certainty what will happen to New Zealand’s property market in the next year or 10.

That requires a crystal ball because house price inflation can be affected by a large number of factors ranging from consumer sentiment to government policy on migration and even the goings-on in Wall Street or Pyongyang in North Korea.

Nonetheless, there are still areas of Auckland where values are increasing, says QV national spokesperson Andrea Rush. “But there are also areas that are decreasing.”

Rush adds: “There are a number of regional areas around New Zealand where values are still rising, like Cromwell, Northland, the Hawke’s Bay and Tasman.”

The big “but” for anyone looking to make money from property is that past performance is not indicative of future results. House prices don’t increase at an even rate; there are lulls in the cycle and sometimes values go backwards, although if home owners and investors wait long enough they will eventually make a profit.

Nor is everywhere on the rise currently. QV House Price Index data shows:

• Medium-sized cities growing: The largest growth over 12 months in medium-sized cities according to QV House Price Index data was 18.1 per cent in Masterton, followed by 16.5 per cent in Napier.
  
• Big cities lagging: In terms of New Zealand’s five biggest cities (excluding Auckland’s outer islands) the big winners were Kapiti Coast, 13.9 per cent year on year growth, Dunedin Coastal 10.3 per cent, Porirua 9.6 per cent and Dunedin South at 9.5 per cent.
  
• Some areas going backwards. Over the past 12 months some parts of Christchurch and Auckland had negative returns, including southwest Christchurch -1.4 percent, and North West Manukau and Waitakere at -0.8 per cent.
  

Investors sometimes make a profit by looking outside the box for somewhere to invest. That might be small towns. House prices in MacKenzie, South Wairarapa, Central Hawke’s Bay and Opotiki have all grown by more than 20 per cent in the 12 months to February 2018.

Ugly ducklings, beautiful profits

Shrewd investors hunt out individual properties that buck the trend. That could be extra bedrooms at the same price, which ensures higher rent. Or it could be properties that can be subdivided or turned into two tenancies to gain higher rent.

Another way to boost yield and make money is to choose higher yielding areas such as Flaxmere (Hastings). Kaikohe, Ruapehu and Grey districts also have gross rental yields ranging from 7 per cent to 7.6 per cent in March 2018.

Buying below valuation

Investors often look to “make money” in real estate by buying below valuation, for example from deceased estates. That gives them instant profit. Another popular trick with investors is to buy properties where the layout can be altered easily to add extra bedrooms and increase rent/capital value.

Making money from investment

“Making money from property” can be viewed in two ways. Serious investors look for yield, not capital gain. Yield is the return from rent expressed as a percentage of purchase price.

The mortgage and bills need to be paid and high yielding properties are financially easier to hold, says Andrew Bruce, president of the Auckland Property Investors Association. If the rent pays the mortgage and bills, investors are “making money” on their business.

Gross yields, before costs such as rates and maintenance are removed, range in Auckland from 1.6 per cent in Mt Eden to 5.6 per cent in Central West. Unless you have good cash flow from your job or other interests, it is difficult to hold a property in Mt Eden long enough to ride the property cycle and get capital gains, says Bruce.