Even before the Government announced it was putting country into lockdown to combat the spread of the coronavirus, New Zealand's 450,000 mum and dad investors, the backbone of the private rental market, were feeling the pinch.
Legislation governing the rental sector introduced last year and the year before, including the loss of tax breaks and the requirements to upgrade properties, had put pressure on the investment sector.
The economic impact of the lockdown and the pandemic has ramped up that pressure. Many tenants have lost their jobs and are unable to pay their rent. Many landlords are in the same position and are struggling to repay their mortgages.
Relief measures from the Government and the big banks have alleviated some of the burdens but there will be many mum and dad investors assessing their future in the market.
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Accountant Matthew Gilligan, managing director of Gilligan Rowe and Associates and a property investor himself for more than 20 years has been advising clients through the Level 4 lockdown, while managing his own portfolio of 62 houses. He’s bought and sold and handful of properties since lockdown, mostly “as is where is” post-earthquake houses in Christchurch.
His key advice to anxious landlords is to “fight to the death to keep the house” and not dump the asset.
“Ask what it will be worth in ten years. It will be today’s price plus some gains. Debt is nearly free, and it’s tax deductible. During the GFC, I said to people to fight to keep those assets and it was the right advice.
“Take a ten-year view. It’s not like those ‘spreadsheet investors’ who look at paper losses in six or 12 months – if you’re not planning to sell, then it’s not a loss.”
Instead, Gilligan has a raft of tactics that landlords can use, right now, to weather the next months.
First up is to talk – and keep talking – to the bank.
“My bank has been amazing. Banks will support you if you have trouble, but ruin you if you fail to communicate, so be pro-active,” he says.
He is of the “cash flow is key, so get your house in order” school of thought so says convert a loan to interest only to use money that would have gone on principal to shore up cash flow.
Gilligan says landlord businesses can cut out a lot of expenses. In his own business during the GFC, he trimmed overheads by $160,000 a month.
He also recommends staying on top of their tenants’ work status.
“Landlords should be vigilant, but not mean spirited. Some tenants are wrecked by the rapid changes to the economy," he says.
“We are getting better interest rates, so we should do our bit and not throw people on the streets. Try to find a path for your tenants to pay you back.”
He is realistic that some tenants maybe using the pandemic as an excuse not to pay, advising that a fast reaction (that is, on the day after rent is missed) means landlords can take appropriate action earlier, not later.
“And explain to the tenants just because they are behind, does not mean they are off the hook for the rent; they have to pay it off.”
Gilligan has been surprised to hear that some landlords, who are in reality directors of a business that pays them a salary, have not taken advantage of the government wage subsidy after a 30 percent downturn in income. He does add that landlords applying for the government business loans have to meet tough Reserve Bank criteria and that banks are lending only to people who “have a good recovery story”.
“So be prepared with cashflows and the normal information they will ask for. They won’t lend if you have no plan to survive.”
Both Gilligan and Sharon Cullwick, chief of the NZ Property Investors’ Federation and an investor since 1998, say that experienced investors understand cycles.
“There’s a property clock, we’ve just come off 12 o’clock and are now on a downwards cycle,” says Cullwick. She says new investors, who only recently jumped into property, will be hurting if they overpaid for the yields their property is now producing.
She says that if the cash-flow forecast means you have to sell, sell now, rather than waiting. She says in the GFC sellers who tried to wait, selling in 2009 instead of the first hints of 2007, did not do well.
But she says, if you’re planning to get back into the market again, be sure to calculate transaction costs (agent and lawyer fees and so on) to sell and buy later before making the call.
“Disruption in the market represents buying opportunities,” says Gilligan. “But that needs a willing buyer, a willing seller with access, and a willing banker.”
Nikki Connors, of Propellor Property Investments, says she is advising her clients not to make hasty decisions and to investigate and apply for any relief measures that can help buy them time.
“You will lose money if you try and dump [your investment property] now," she says.
