Investor bought 12 houses in pandemic
Michael Burge bought a dozen properties during the Covid-19 pandemic, taking his portfolio from five homes to 17, and he launched his own real estate consultancy.
Despite many factors working against investors, including falling house prices, stalled rents, and rising interest rates, Burge said his balance sheet remained strong.
While the value of his portfolio has taken a hit, Burge said he would avoid any forced sales because his purchases were made with cash flow in mind, and all made enough on rent to cover mortgage repayments and run at a surplus. That was not the case for many other investors, he said.
The ‘‘cash flow principle’’ was ignored by the majority of investors, particularly mums and dads, and Burge said there would be forced sales from this group in the next couple of years.
‘‘There are very few investors like myself who buy like it is a business, where it has the cash flow and has the value add.’’
He said many investors had bought in urban centres when prices were far lower, enjoyed massive capital gains, and thought they could do the same thing again.
So they would buy another ‘‘home-like’’ property in bigger cities but prices were now so high, and rental income so low by comparison, the rentals would lose money – a factor they may have ignored. ‘‘The problem with New Zealand is we have been so lazy with our investing because we have had such strong capital gains.
If someone bought a rental that lost money at low interest rates, then at high interest rates the situation would be ‘‘disgusting’’ – especially as the loss of mortgage interest deductibility was phased in. ‘‘There is going to be a lot of pain for people. Cash flow is king, it always is, it always will be, and at times like this it is cash flow that is going to save people.
‘‘To me what happens to property values – I really don’t care, as long as the cash flow is coming in and my debt is being serviced, and I am able to live comfortably.’’
Burge said he welcomed the fall in prices, because the situation had got out of hand.
He said by the later parts of last year, prices were so high, he could not find any homes to recommend to clients, because rental yields simply would not justify the prices.
Burge was among those who secured the record-low home loan rates of the Covid-era in the low 2% range. Despite some of these terms having six months left, in the middle of the year he broke a number of them and refixed at the higher rate of 5.15%.
‘‘I knew my cash flow was still good at that interest rate but I knew at 6%, 7%, 8% it wouldn’t be, so I kind of tried to be proactive.
‘‘I saw it as ... I have got at least decent cash flow for the next year or two.’’
A two-year fixed rate currently sits about 6.2% and with more increases to the official cash rate expected at the end of the month, they were likely to climb higher, he said. Burge opted for two-year terms because he wanted to see through the next general election, which would have massive implications for investors.
The National Party has pledged to scrap the Labour Government’s phase-out of mortgage interest deductibility, which will result in many investors losing the ability to deduct interest costs from rental income for tax purposes progressively over the next three years. The Government’s move made many investors’ de facto playbook, to take on large debts in order to subtract interest payments from rental income and then cash in on capital gains, no longer feasible. Burge said the loss of interest deductibility, combined with higher interest rates, could prove a breaking point for investors who had overly leveraged themselves.
Burge started Real Estate Consulting NZ at the start of Covid, with most of his clients coming through Facebook and Instagram.
Up to that point investing was something he had done on the side, and he had bought five properties, cataloguing the purchases and renovations on social media.
While many were predicting the kind of house price falls a pandemic might be expected to bring, Burge saw things differently.
He knew rock-bottom interest rates would encourage buying and the relaxation of restrictions on how much investors could borrow would only add to that.
‘‘They also deferred people’s mortgage payments, so I knew there wouldn’t be any real financial stress on anyone. It was the recipe for things to go crazy.’’
He left the fitness industry and said his consultancy was an instant success, buoyed by a strong social media following. He started shopping around for himself too.
‘‘So those five turned into six, seven, eight, then you have got cash coming in from the business, then those prices are going up.
‘‘So it was a combination of cash from the business and improved equity as they dropped interest rates and prices started to go up.’’