COMMENT: Investing in property is an emotive topic, and it’s often hotly debated. Our ability to invest successfully greatly affects our quality of life and fundamentally comes down to education and discipline. I spent many years reading about how to get rich quick and my takeaway was that it doesn’t matter what you do – as long as you do something – and you don’t get rich quick. So, buckle in for the long haul.
With property, debt gives you the ability to enter the market and supercharge your returns. Given how the New Zealand housing market has performed over the long-term, it is likely that investing in property will continue to be a good avenue for those wanting to grow their wealth.
There are two key questions for those contemplating entering the market: “How much money will I make?” and “Is now a good time to invest in property?” The answers depend on a lot of factors, many of which are out of an investor’s control, so let’s narrow the discussion down to what an investor can control.
It’s commonly stated that you make your money when you buy and that comes down to what you are prepared to pay. Can you walk away from a transaction if the numbers don’t add up?
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When investing in a property I’m looking for a positive cash flow, with capital gains being the icing on the cake. If cash flow isn’t positive, then the money must come out of my income and that affects my quality of life or other investment opportunities. Working through an example provides some perspective.
In this example, and you would need to change the inputs for a property you were investing in, I know that each year I’m going to need to contribute $38,200 from my personal income. That doesn’t make it a bad investment – it just gives me different decision points. How much capital gain do I think I will make during my investment? If it’s 3% a year then it’s an $18,000 gain in year. Can I improve the property and increase my rent by $50 a week – another $2600 a year?
Interest rates (both up and down) have a significant effect on the investment, with a 1% decrease giving you an extra $6000 a year. There is an argument for ignoring the interest component if you have sufficient cash to fund all or part of the purchase price, however with term deposit rates around 5.7% for 12 months, the opportunity cost on interest income is significant and should be considered.
Recent changes in legislation have resulted in property investors needing to improve the quality of their investments (increased maintenance costs) and not being able to deduct interest (increased tax costs). Potentially there is the ability to increase rent but there is a limit to what tenants can afford to pay. We just need to factor these into our expected return and the price we are prepared to pay.
Ultimately the decision on whether to invest in property comes down to whether you are willing to cover any shortfall in revenue and whether you are willing to ride the ups and downs and be in for the long haul.
- Glenn Dunn-Parrant has been investing in property for 30 years and works for NZME.
