Vital tips for budding landlords
So you want to be a landlord? With interest rates low and the property market strong, investing in rental housing is increasingly appealing for many people. But while it’s a New Zealand favourite, property investment is not a one-way bet. Here are some things to think about before you jump in.
Howmuch can you borrow?
Most banks will let you draw on the equity in your existing house (if you have one) to create a deposit for your investment purchase.
To do this, many people increase their existing loans until they are about 80 per cent of the value of their home. This often frees up enough cash to make the down payment on the second property.
If this is not an option, you can save your deposit – expect to need at least 30 per cent to qualify for an investment property loan.
Property investor Steve Goodey urged new investors to focus on getting their financial affairs in order. ‘‘Take your finances seriously because you will be judged on them,’’ he said. ‘‘Defer the new car purchase, protect your incomeproducing job, keep your expenses under control. Avoid all consumer debt, don’t take out cash from the ATM at SkyCity every Saturday night and reduce your credit card limit.’’
Get advice
Bindi Norwell, chief executive at the Real Estate Institute, said people should ‘‘do their homework’’ before making any moves. ‘‘Talk to your financial adviser about your position and get a better understanding of what your risk profile looks like and how you’ll cope if your property is vacant for two or threemonths between tenants. Talk to people who already have investment properties,
undertake some research online and look to learn from others’mistakes.’’
Goodey agreed it was worth getting advice from people who had a proven track record in investment.
‘‘I learned that finding someone who has achieved what I wanted to achieve and replicating their actions works very well. Don’t assume that your real estate agent, lawyer, or accountant has any property themselves.’’
Research
Understand what you’re buying, and why. Goodey recommended looking for houses that were cashflowpositive before tax on a 25-year mortgage. ‘‘Cashflow-positive’’ means that the rent they bring in more than covers the cost of owning them. ‘‘Sure, it’s conservative but it will keep you safe and give your young portfolio time to gain some momentum,’’ Goodey said.
‘‘Capital gain will come, you’re at the highest risk early on when your loan-to-value ratio is usually highest.’’
He recommended new investors look for normal family homes or multi-income properties. They should avoid anything that needed structural work, houses with weathertightness issue, earthquakeprone properties or long subdivision projects, he said.
Norwell said people should understand what they were trying to
achieve before they bought.
‘‘Most property investment falls into one of two strategies – an uplift in capital gains from a longer-term investment strategy or strong yield from rental returns. Neither strategy is ‘better’ than the other, but over time most investors would look to have amix of both. Other strategies include renovating properties, buying off the plan or looking to buy land that can be subdivided.’’
Choose the right area
Goodey said Aucklanders should look for investment properties in other parts of the country, where prices were lower. Gareth Kiernan, chief forecaster at Infometrics, said areas such as Westland, Kaiko¯ura and Queenstown were struggling more than less tourism-dependent areas and could deliver bigger capital gains when recovery happened.
‘‘If you’re able to cope with a relatively poorly performing asset in the near term – with a difficulty attracting tenants and/or possibly still some price falls to come – these markets have the potential to record some above-average growth further down the track when international tourism starts returning to normal.
‘‘The central Auckland apartment market could also provide some bargains over the next year.’’
But he said the best long-term capital growth prospects would probably come from Rodney in Auckland, Waikato, and Queenstown.
‘‘Christchurch and Selwyn also deserve amention, not because they generally enjoy sustained price growth tomatch Auckland or Queenstown, but because the housingmarkets there are relatively well supplied given the post-quake rebuild, so housing looks to bemuch less overvalued than other parts of the country. Thames-Coromandel also tends to move in tandem with the Auckland market, and could be a strong performer over the next couple of years given the shift of spending to domestic tourism.’’
He said while cheaper areas often offered higher yields, they could have higher risks. Populations tended to be smaller and more dependent on a few key industries.
Understand what’s involved
Property investment is about more than just buying houses and renting them out. Once you own them, you have to manage the tenancies or outsource it to someone else.
Goodey said it was worth employing a professional property manager. ‘‘One of the hardest parts for new landlords is to run your business like a business. Your tenants are your clients and the best way to serve them is to have a profitable business. Avoid getting emotional about the houses, but still make them safe, warmand healthy.’’
Norwell said investors should understand the rules. ’’There are a number of changes to legislation in the next 12 months or so, such as the Healthy Homes Standards and the Residential Tenancies Act, so it’s important that you know when the changes come into effect and what they mean for you and your tenant. Many investors choose to use a property manager to support them with this aspect of their investment and make their life just a little bit easier,’’ she said.