Landlord ambition
It’s not too late to get started, even if you don’t have millions to spare, writes Susan Edmunds.
Are you subdividing, or seeking capital gain? Susan Edmunds looks at six ways to be a property investor.
New Zealand’s property market looks to have turned, but would-be property investors are being told that does not mean they’ve missed their chance.
Financial trainer Hannah McQueen said investors could make money in all parts of the property price cycle.
‘‘It doesn’t have to just be going up. When things come off, you can buy at a discount and make your money upfront, not over time. You pocket it straight away,’’ she said.
There are a number of ways you can get started.
Buying for capital gain
This is where you buy a property, expecting the price to rise.
Bayleys Real Estate managing director Mike Bayley said this strategy was most successful during the ‘‘up’’ phase of a property cycle.
‘‘Most recently 2012 to 2016, where, in Auckland at least, values have risen year after year by approximately 10 per cent annually.’’
It can also pay off when investors buy a property in an area that is becoming more popular – either due to population growth or the development of new infrastructure in the area.
But Auckland Property Investors Association president Andrew Bruce said buying for capital gain was one of the more expensive ways to start.
Buying for yield
Yield-seeking investors are looking for the income they can make from rent.
At the moment, it’s hard to get a high rate of yield in the bigger centres. Across Auckland, yields of between 3 per cent and 4 per cent are normal, and from that you have to cover all expenses.
Cheaper areas usually offer better yield, because rents are higher when compared with property sale prices.
Bayley said a Massey University analysis showed 22 per cent or 23 per cent of the rental income of a property should be kept to cover its costs.
Bruce said everyone talked about capital gains but it was investors with strong yields, who focused on what they were earning from their properties, who did well over the long term.
‘‘It’s not sexy to say ‘I made $20 passive income a week this month.’ It’s not going to get a stirring conversation going.’’
Owner-occupier landlording
This is one of the cheaper ways to start making money from residential property. Bayley said it was usually an option for younger homeowners who had bought a property with multiple bedrooms and rented some of them out, thus getting help to pay off the mortgage and some of the household bills.
‘‘With a marked rise in the number of international students now studying at New Zealand high schools and tertiary education centres, more and more Kiwi families have taken to hosting foreign students in the homes,’’ Bayley said.
‘‘This arrangement generates gross weekly income of $220 to $250 per student. From this, costs such as feeding the student, along with their portion of power and water usage, can be removed to calculate a net income figure.’’
Internal reconfiguration
Bayley said creating a separate flat on an existing property was an option for bigger houses that were configured so that a portion could be separated off for people to live independently.
‘‘This option works well where a dwelling has several standalone bathrooms, multiple sinks or basins plumbed [and] which are suitable for use as a kitchen/ kitchenette, and multiple door access points to the building.
‘‘Granny flats are usually the resulting studio, one-, or twobedroom units with their own entrance, bathroom/toilet and kitchenette amenities.
‘‘They can have their own power [and/or] gas connection, allowing the tenant to pay for just what services they use.
‘‘Water can be serviced as a separate utility connection for each tenancy, although the cost of creating this off the mains can be several thousand dollars.’’
He said the cost of creating a flat could vary from $10,000 to $60,000 depending on the scale of fitout required. This work will need a building consent and might also need resource consent.
Property investment coach Lisa Dudson said people buying a residential property advertised as ‘‘home and income’’ should check the Land Information Memorandum (LIM) report to make sure the ‘‘income’’ portion had been consented.
Adding a minor dwelling
Bayley said people could put a minor dwelling on an existing section without the need for a subdivision.
‘‘Specialist minor dwelling building companies undertake the construction of such dwellings as their core business and advertise in local newspapers and property press. Under council bylaws, minor dwelling-classified homes can only contain up to 65 square metres of living space – which should be enough for three bedrooms,’’ he said.
‘‘Budget for $150,000 to $200,000 including appropriate council consents, with construction taking three or four months depending on site topography, access and the construction firm’s scheduling.’’ A minor dwelling cannot be sold separately from the main property, but can be rented.
Subdivision
If your section is big enough, you may be able to cut it up into smaller portions.
Bayley said this could cost more than $70,000 in Auckland.
You could then sell the bare land: Real estate agents would then add another 3 per cent or 4 per cent in commission, plus marketing costs, and the seller would have to cover legal fees.
Another option is to add a property. You could move a cheap relocatable house onto the section or build new.
Andrew Bruce said property investing was a ‘‘time in the game’’ business. ‘‘You can sort of guess we’ve been at the top of the cycle. If you have a property worth $800,000, you’re not going to take a bet with me that it will go up another $50,000 this year.
‘‘But you’ll definitely take a bet over 10 years that it will go up
$400,000.’’
But be warned. McQueen said it was easy to be caught out.
‘‘In Auckland there tends to be more lemons than good properties from an investment perspective. A lemon is a property that you can’t afford to hold in all parts of the property cycle.’’
She said people could be caught out if they owned a property they could not afford when interest rates rose. ‘‘People who get burnt are those who have to sell when the property market is down.
‘‘People think they can jump in and will be fine and I’m crossing my fingers for them that it will be.
‘‘If interest rates go up 1 per cent that’s a couple of hundred more dollars they need to come up with; then, if the tax efficiencies aren’t there, that might be another
$100. If they are already living payday to payday they don’t have the tolerance to do that.’’