Investing in property

By VICKI HOLDER

Deciding what to buy when investing in the residential property market is inevitably a trade-off between a property that earns a high rental return and one that provides better-than-average capital gain. The ultimate is to attain both from the same property.

But what you buy depends on how serious you are about the business of investing. Do you simply want a property to enjoy for your own personal occupation, or are you prepared to actively take risks to help build your wealth more quickly?

Kieran Trass, of Hybrid Property Consulting, says if you are a serious property investor you need to pay close attention to balancing cashflow and equity if you wish to stay permanently in a position to buy more property.

"Whether you actually buy any more property is irrelevant, but it is critical that you are ready financially to buy if you want to," he says.

However, if your resources are relatively limited, or you are contemplating your first investment, most experts recommend you consider a property that provides a positive cashflow, before any tax benefits kick in.

Independent investment analyst Rozanna Wozniak explains: "This will ensure you are not eating into your other income to pay the mortgage on that rental property. The tax refund should be considered as a bonus. It will also ensure your borrowing capabilities are not hindered significantly if you decide to buy another property."

She suggests considering a property that will give a better expected capital gain as you build your portfolio. In this case, you may need to supplement the rent with your own earnings to pay the mortgage.

Wozniak says look in areas like South Auckland, West Auckland and towns in other parts of the country for properties that earn a higher rental return. She says properties that give better capital gain are those in short supply, such as stand-alone houses close to the centre of cities, those in places with growing populations or those close to the water.

Trass suggests some inner-city apartments give good cashflow, but he recommends you seek independent advice about their rental returns. He also points to multiple income-type properties, such as a home and income. Again, check first to make sure the property is council-permitted for such a use.

Deborah Kelland, of Kellands Real Estate, Parnell, recommends: "If you want the best return and a passive investment, buy an apartment. If you want good capital gain and are not so concerned about income, look at buying land, coastal in particular, for the long term.

"If you want a more active investment with good potential returns but with greater risk, look at commercial or industrial.

"If you are happy with a low income but good steady capital gain prospects over time, look at buying residential property in good locations. But be prepared to deal with maintenance and tenanting.

"Houses and land are more focused on capital gain, whereas investment property, like apartments, are far more suitable for income returns. Apartments provide the best cashflow, providing enough income to pay all outgoings while also providing additional income for investors."

Do your homework. When looking for a rental property you don't necessarily need a property of a standard you would want to live in yourself. Wozniak says look for the simple things tenants would want, such as fenced houses with off-street parking.

Don't bid up the price in a strong market. Don't be scared to walk away if a seller wants more than you are willing to pay. Work out a price you think is a good buy and will ensure a good yield and stick to it. There will be other opportunities, says Wozniak.

Be careful of buying at the peak of the market and selling at the bottom if you realise the value of your property has declined. This is most likely to be a concern in areas that have experienced large capital gains during recent years and are selling well above their CVs. If you are concerned about the market overheating, consider waiting it out. There may be bargains during the downturn.

Wozniak says make sure your expectations of capital gain are realistic. "Don't simply assume 10 percent regardless of location simply because someone with a vested interest has suggested it to you. Consider joining your local Property Investors' Association and share your concerns with others who have been through similar experiences."

Include a buffer in your calculations for the times when the property may be vacant.

Don't forget ongoing costs in your budget, including maintenance, insurance, rates and property management fees, as well as legal fees, rental appraisals and chattels valuations.

Consider consulting an accountant to see whether you need to set up a Loss Attributing Qualifying Company or a Family Trust.

Kelland says steer clear of apartments with no significant difference. If they don't have at least a view, higher stud height, quality fit-out, good location or sound-proofed construction, then forget it.

Trass advises against buying boarding houses, as consistent cashflow is questionable, and he warns of maintenance issues that can cause problems with conversion apartments.

The final word from Trass is don't pay too much to get educated about property investment or wealth creation. Some people have spent so much money going to courses to get educated, they have little money left to actually buy anything with!