7 tips to get rich slow
Millionaire reveals key tips to property investment that don’t rely on rising house values
Buying rental properties is often viewed as the ultimate retirement savings plan or akin to owning a goldmine — and there is merit in the view.
House prices have boomed over the past 20 years, driving the median value of some parts of New Zealand up by more than half a million dollars from 1999 to now.
That’s serious coin in the bank for those who bought years ago.
According to real estate firm Colliers, it’s led rental homes to deliver better financial returns — from rents plus capital gains — over the past 15 years than money invested in the stockmarket or commercial property.
So better start buying, right? Well, there are some things to consider first.
For one, rental properties are now often seriously expensive to buy. And once you spend your savings buying one, there is no rule to say it will automatically go up in value.
On top of that, ownership costs have risen. New Government regulations designed to make rentals better for tenants have forced rental owners to spend more money upgrading their properties.
So is it still a good time to buy an investment property?
Millionaire Hawke’s Bay investor Graeme Fowler says yes — provided you can find one that delivers good rental yields and the deal makes sense on the day you buy it.
Fowler and wife Katrina own about 80 residential and commercial properties and in 2017 traded 24 properties for a profit of just under $1 million.
That’s made them as rich as a major Lotto winner.
“If we sold all our rental properties and paid back the mortgages, we’d have around $20 million cash left in the bank,” Fowler said.
Yet his riches weren’t founded on lucky punts or predicting future price rises with a crystal ball, he said.
Rather, the key to his success was buying properties offering good rental yields and then holding on to them for the long term.
Rentals with good yields are those where the rental income is high enough to pay for most — if not all — of the home loan repayments and other ownership costs, such as the mortgage, rates, insurance and property management fees.
This means an investor needs to — in theory — only stump up the cost of the deposit.
Then, without spending any more money, they ultimately end up owning a fully paid-off home.
That’s Fowler’s goal, to have multiple, paid-off rentals that deliver him an income he can live off.
With his current properties, that would equate to an income well over $100,000 per month pre tax.
It’s a strategy that doesn’t depend on house prices going up. And that’s why he recommends it to others as it’s “a lot lower risk”.
“In other words, as long as the rent covers all of the outgoings, that was all I needed to know,” Fowler said.
“I have never been concerned about what house prices are doing. It’s one of the most ridiculous subjects people talk about.
“You will often hear people say how their home has gone up so much in value, and I get the impression when listening to such nonsense, they think they are smart.”
Just like the daily weather, Fowler said he never knew what house prices would do from one year to the next.
“The weather is going to do what it does, and all you have to do is dress appropriately for it.”
Fowler’s strategy
Fowler’s strategy worked especially well in 2014 in Hawke’s Bay where he and Katrina live and own most of their properties.
The region’s prices dropped by close to 30 per cent between 2006 and 2014.
It meant if you’d bought a property for $190,000 in 2007, chances were it was worth only about $135,000 to $140,000 in 2013.
Many investors were running scared and selling up. But Fowler started buying.
“When prices were really down, the numbers and rental yields seriously made sense,” he said.
He bought 20 rental properties in 2014 by taking out home loans secured against other properties he already owned.
“I was able to buy 20 properties for a total of just under $2.5m and put no money in myself,” he said.
“The rent covered the mortgages — which are all 20-year principal and interest loans — the rates, the insurance and also property management fees.
“So it doesn’t matter whether the rentals are worth $100,000 or $500,000. What matters is the cash flow from the rent once the debt is paid back on all of them.”
“For all I knew, the prices could have kept going down even further and it would have been no concern to me at all,” he said.
Just six years later, those 20 homes had now created over $4m of equity, he said.
Yet in 2014 most buyers — especially investors — couldn’t see the big picture that the homes would’ve paid themselves off over the longer term.
“They could only see how much money they thought they had lost because the value of their own properties were all going down,” Fowler said.
Fowler even wrote a book describing his experiences and tips from 2014 called 20 Rental Properties in One Year.
The magic number
Fowler’s trick in 2014 was to look for rental homes where one year’s rental income was equivalent to more than 10 per cent of the home’s value.
This 10 per cent rental yield was typically enough to ensure the rent covered the mortgage repayments and other expenses.
But it’s not easy to find investment properties offering such high rental yields now house prices have grown faster than rents.
In such cases, Fowler recommended investors look for creative ways to get better yields.
That could include buying an older home and renovating it so it’s possible to charge higher rents, or increasing the number of bedrooms in the property.
Or it could mean buying in a different location where house prices are cheaper but rents are still strong. Or simply putting down a bigger deposit.
Trading
Fowler has also traded properties — buying and moving them on quickly for a profit — like he did in 2017.
But he has also kept a core portfolio of rentals delivering good yields that he intends to hold on to for the long term.
That had always been his core strategy, he said.