Lure of property is strong but it's not a sure bet

If you buy that renter, what happens if the tenant leaves and the rental property is empty? Can you afford to carry the mortgage? Photo / Brett Phibbs

Let's face it: property is the investment many Kiwis consider the best for preserving the value of their nest egg and generating money.

But putting all your cash in bricks and mortar might not be the best move.

Before you buy that nice little renter, ask yourself if you have got a good split of cash in the bank, fixed interest investments in the longer-term money markets, property and shares.

You might own your own house with or without a mortgage, become wealthier as it rises in value and like the idea of being a landlord.

But professional investment advisers encourage their clients to think about diversifying risk and returns when they choose what assets to buy.

Understanding the four asset classes is the first stage of diversification. Often, when one asset class goes up, another falls. And the Government is encouraging people to think less about gearing up with big borrowings to buy houses and instead to think more about savings.

Spreading your money spreads your risks. Having everything in a single asset class like property increases your risk.

What percentage of your total net worth is made up of your own house? If you buy that renter, how will this picture change? Do you have savings in the bank? What happens if the tenant leaves and the rental property is empty? Can you afford to carry the mortgage? What happens if your financial or personal situation suddenly changes and you need to sell the property?

ING (NZ) says diversification is the prime tool used by wise investors to maximise returns and minimise risk. It can be summed up very accurately with the old saying: "Don't put all your eggs in one basket."

If you do buy the property, the NZ Property Investors Federation is the umbrella body for 20 local Property Investor Associations throughout New Zealand.

It provides a range of services to thousands of landlords and it has an Auckland arm plus a specialist apartment arm for landlords.

A code of ethics, discounted insurance scheme, speakers, seminars, commentaries, economic information and networking opportunities are offered so people can find out more, become more professional and get help if they need it.

One of New Zealand's leading economists, Rodney Dickens, says diversification is the key for would-be landlords.

"Your starting point of the asset class split is a good one. Then you need to compare valuations in the different asset classes," he says.

As a benchmark, he encourages people to use as a starting point the risk-free 10-year Government bond with a yield and return of 5.37 per cent.

"Housing is more risky, so the rental yield on housing should be higher. In the decade before the housing boom the gross rental yield on housing was 2.2 per cent above the 10 year bond yield, which is the sort of thing we should see to reflect the greater risk of housing. So with the gross rental yield now close to the 10 year bond yield it means one of the important investment parameters is ringing warning bells.

"Then you do the same thing for the sharemarket.

"It is more risky than the housing market so should have higher yield to compensate," Dickens says.

The Department of Building and Housing has a comprehensive guide for landlords and tenants under its tenancy section.

Tenancy Tribunal orders are online and can be looked up via an application. They make for some salutary reading because about three-quarters are taken by landlords against tenants.

The Residential Tenancies Act 1986 sets out the law, defines the rights and obligations of landlords and tenants of residential properties, established the Tenancy Tribunal to resolve disputes between landlords and tenants and set up a fund into which bonds payable by tenants is held.

The Big Four

* Understand the four asset classes: Shares, cash, fixed interest investments and property.

* Diversify within those.

* Choose the right mix.

* Pick your investments.

* Review them regularly.

- Source: ING (NZ) Moneytalk