KEY POINTS:
Owning rental property to provide a nest egg is the dream of thousands of New Zealanders.
More than 100,000 Kiwis own rental properties and for many, becoming an investor has paid off handsomely.
They can expect to get a regular income from the rent paid by tenants and overtime build up a capital gain from their investment. As Rich Dad Poor Dad author Robert Kiyosaki puts it, a property investment is "something tangible that someone else pays YOU to own".
Back in the old days investors had to save for deposits to buy their first rental property. Now many investors have bought their first property by extending the mortgage on their own home.
Nonetheless property investment requires work and there's risk involved that not everyone can stomach. Nor is it a guaranteed route to getting rich quick.
How to get started?
Typically property investing is seen as more risky than putting your money in the bank or other fixed interest investments (excluding finance company debentures)and safer than investing in shares. If you can stomach the risk then the next step is to sort out your strategy.
Is it going to be income or growth? Although property investing provides both most investors consider income as essential to pay the bills and growth as a bonus.
Those who have an income-strategy, perhaps because they're retired or don't have a day job, will look for properties that have a high rental yield (what a landlord can expect to receive in rent, expressed as a percentage of the purchase price of the property).
Someone who focuses on growth still needs to be concerned that they are receiving sufficient rent from a property to make it pay its way, but will sacrifice some income to target properties that they feel have the highest capital growth prospects.
As well as a strategy you need to set goals such as to buy one property a year or to build up say $1m in equity over five years. Successful investors review their goals several times a year. Carmel Murphy, property adviser who runs the company Leaping Frog, has a dream board where she sticks pictures up to visualise her property and life goals.
"Your images lead your reality," adds Lisa Dudson author and financial planner at Acumen. The experienced property investor runs Avana Properties, a company which markets "property superannuation" deals to new property investors.
Time to go shopping
Once you've decided what your strategy is and set some goals, then it's time to go shopping. Many experienced investors say they will view as many as 100 properties and put offers in on 20 before settling on one.
What's more, they know not to be swayed by their emotion. That fancy Italian kitchen and designer bathroom may look desirable, but often won't pay its way.
"When it comes to investment, 'feel' is a four-letter word," says property investor and author Martin Hawes.
Major renovations can be a waste of money as well because they leave the property empty for too many weeks or months. A profitable buy is often a property with good bones that needs no more than a quick makeover to make it desirable to tenants.
Arranging your team
The importance of using your own professionals was highlighted by the problems suffered by Blue Chip investors when their investments went awry earlier this year. Most had been directed by Blue Chip to hand-picked lawyers and accountants. When the true situation came out, some found out that the contracts they signed were often heavily weighted against them. A truly independent professional would have warned them in no uncertain terms of this.
Your team, says Murphy, should include a lawyer, accountant, valuer and mortgage broker who you know and can trust. It's also worth building up relationships with good real estate agents who understand your needs. Having a good, fast and trustworthy team allows investors to move quickly when they find the right property. With property investment not just any accountant or lawyer will do. You need ones who specialise in property.
Make sure you listen to these people, says well-known investor Olly Newland. "Don't let your ambitions get ahead of your abilities. For your own sake don't assume you know everything or that you can do without the advice of experts like valuers, lawyers and property consultants."
Are the profits still there?
Property markets go in cycles and right now we're probably pretty close to the top of the market in New Zealand if not on the slide downwards. What that means for a new investor is that it's difficult to find a property to buy where the rent is sufficient to cover all of your costs.
Some investors are still buying what's called "negatively geared" properties. That means that the incoming rent doesn't cover the mortgage, insurance, rates, maintenance and other costs. Some of the losses can be clawed back by claiming them against the tax owed on your day job.
The logic of negative gearing is that although you're having to top up the mortgage by say $50 or $100 a week, that's okay for some investors if the property value is growing. These investors ascribe to the argument of Dolf de Roos, seminar presenter and author who is often quoted saying: "The deal of a lifetime comes long about once per week."
The opposite of negative gearing is "positively geared" where the tenant pays all your expenses and a little more. These properties are very hard to find in the current market. This will only change if property prices fall relative to rents, the latter rise, or a combination of both happens.
In light of all this, buying below valuation is a good idea because it means that you have instant equity in the property. Obviously not everyone wants to sell their property for a song. But some, due to factors such as death or divorce or the fact that it's in need of a good tidy up, will sell cheaply to get the property off their hands.
Is it a good investment?
Residential property values in New Zealand tend to double in value every 7-10 years. In theory any time is a good time to start investing in property, providing you plan to hold the property for the long term.
Beware, however, of getting into a negatively geared property that may not go up in value for five years or more. It can be very demoralising to shell money out every month on a loss-making property year after year.
It might, however, be a better bet to invest that $100 a week in shares, funds, or even high interest bank accounts - withdrawing it once the property market has been in the doldrums for a few years and starting investing then.
The numbers
It's important to research each and every property purchase thoroughly. That includes getting to grips with localised and national economic data and trends. If ultimately the numbers don't stack up, don't buy.
This is called doing your "due diligence" and if it's done properly, you'll find more often than you expect, that boring box down the road from the "great buy" you've found may be a much better cash cow. It may, for example, have a garage that can be turned into a legal sleepout.
As well-known investor Olly Newlands says: "Always look for the angle or 'twist' that can turn an ugly-duckling property into a deal of a lifetime."
What you need to research is:
" Price.
" Potential rent.
" Ease of renting.
" Historical and potential capital growth.
" Planned developments in the neighbourhood.
" Impediments to buying, such as an illegal extension.
" Previous criminal activity in the property, such as P labs.
" The title.
Much of this data is available online and to find out more, read the article Property by the numbers on the NZ Herald website:(http://www.nzherald.co.nz/section/466/story.cfm?c_id=466&objectid=10462114&pnum=0).
Many investors use property analysis software such as RentalAnalyst, at PIA (Property Investment Analysis)or REVIQ to analyse purchases. Or a simple spreadsheet-based analysis can be downloaded from Acumen.co.nz for $29.95.
The investor enters data such as purchase price, typical rent for the type of property and area, fit out costs, maintenance, rates, into the software and it spits out details of potential yield and capital gain over one, two, five and even 20 years .
It's a great way of cutting through the estate agent superlative and analysing the numbers. And as Mike Summey, author of The Weekend Millionaire Mindset says: "If the numbers work, buy."
Get rich quick
Everyone in New Zealand must have been to a barbecue where they met a property investor boasting about his or her prowess in making money. Some are pretty savvy. Others have gotten rich through no fault of their own. They've been carried along by the property market.
It's important to be aware that these people put hard work in and also had the luck of starting their investing at the right time in the cycle. As investor Dean Letfus, who runs property company Massive Action says: "Opportunity usually comes dressed in overalls and cleverly disguised as hard work."
Sharks
Property investment is full of people who want to help others. Sadly it also attracts the sharks on the hunt for fresh meat.
Often these people have something to sell. It may be high-priced seminars, or overpriced property. Those that aren't upstanding use all sorts of ploys to convince investors to part with their money.
That's all the more reason to make your own decisions based on advice from professionals who you have chosen independently.
Packaged property investments and off the plan sales
There are numerous companies in New Zealand selling off-the-plan (new property that has yet to be built) investments to investors. Sometimes these will be "packaged" to include rent guarantees.
But as the failure of Blue Chip Financial Services earlier this year showed, the services offered by these companies aren't as safe as houses. Companies such as Blue Chip sell naïve investors the idea that the property will rise in value by the time it's built and they will walk away with a tidy profit.
But when investors go to sell, they often find the riches promised, don't materialise. In the case of Blue Chip, many investors had paid deposits on off-the-plan apartments, then waited year after year for the project to be built, which never happened.
Instead large numbers of investors appear to have lost deposits or found themselves owning apartments or other property worth considerably less than the registered valuations suggested they maybe worth.
Needless to say buying off-the-plan property is much more risky than buying a bog-standard three-bedroom suburban home that has already been built. For a reality check, take a trip to your local property investor association meeting and try to find experienced investors whose strategy is to buy off-the-plan property. They rarely do.
Mostly it's first-time buyers who don't realise they're getting a bad deal. Some such as many Blue Chip investors face losing their own homes and nearly everything they've saved for all of their lives.
Property investing is easy
Despite what the salespeople say who want you to buy packaged properties, DIY property investing is relatively easy if kept simple. Sure, you've got to find a suitable property to buy in the first place. But once you've got your hands on the property you can let it through a property manager who will handle the day-to-day dealings with the tenants.
Many investors, however, don't have that much trouble learning the ropes of landlording. The Department of Building and Housing is a good place to start. It has information on what to do at the start and end of a tenancy, and how to manage your rental property to avoid problems.
It also runs seminars for new landlords and has a series planned in different centres throughout New Zealand from March to June. Dates and venues can be found at this website: http://www.dbh.govt.nz/landlordsevents-contact
