KEY POINTS:
Coming to a barbecue near you is someone boasting of their property success. It's that time of the year. With the property market having gone through another record-shattering year in 2006 and real estate agents' signs popping up in virtually every road, there will be plenty of would-be investors wondering if they should "be in property".
Some will be hoping to be millionaires by Christmas but others are perhaps more conservative in their aspirations.
But getting into property investment isn't as simple as having an eye for a nice place. In fact buying a clone of your own home isn't likely to be a winning strategy.
Property investment is a business and would-be landlords need to learn the ropes. You wouldn't become a computer programmer or teacher without learning how it's done.
You'll also need to develop a strategy, because not all property investors follow the same path. In the food business for example, McDonald's has a different strategy from a restaurant chain such as Mecca. Yet they both sell food.
In property investment, a common "strategy" is to buy and hold suburban three-bedroom properties. More complex strategies include: buying and controlling entire blocks of flats, cross-leasing, or putting a minor dwelling or granny flat on the back of an existing property to increase its return.
For some, the high-risk business of property developing is the way to go. Or, if you have motivation and knowledge but no capital, you might want to team up in a joint venture with a high-earning professional, who has capital, but no time, says property mentor John May, who is also on the board of the Auckland Property Investors Association (APIA).
In the current tight market, more and more investors are "trading" properties, buying and reselling fairly quickly to turn a profit.
Towards the beginning of this decade it was very easy to find "positively geared property", ones where the rent covered mortgage payments and other expenses such as maintenance, professionals' fees, rates and so on.
That figure, the "yield" was often in excess of 10 per cent. These days, says May, investors are getting 3 to 6 per cent yield in Auckland, while paying at least 8 per cent interest on their mortgages.
In order to be successful this year you need to have a plan and find properties "with a twist", says May. That can often mean home and incomes, or ones that can be renovated for little cost to boost the rents.
Even if you do make a day-to-day loss on the property, it is possible to make it cash-flow positive by claiming depreciation on the property and its chattels, meaning you pay less personal tax to make up the shortfall. It should be said that this is an area where expert advice is important. All too often brand new properties are sold on the "tax efficiency" to naive investors, who find when they sell that the IRD claws back excess depreciation.
Ashley Church, CEO of APIA, recommends that prospective investors write themselves a property investment plan to ensure they know what their objectives for investing are. The website acumen.co.nz, has a number of free templates from the book Get Your Head out of the $and by property investment author and financial planner Lisa Dudson, that help with this task. They include a goals and objectives template, task list, and retirement calculator.
It's important, says Church, for a new investor to get advice from experienced professionals. That means a specialist lawyer, accountant and mortgage broker that understand property investment, not just Joe Bloggs accountancy down the road.
There are an awful lot of mistakes made by newbies. They include "tainting" your buy and hold properties by trading other properties - which could mean you pay capital gains tax on all of them when you sell.
Another big mistake is keeping all your mortgages with the same lender. If one investment goes wrong, it's possible for the bank to call in the mortgages on all of your properties - making them fall over domino style.
Oddly enough, another big failing is inaction: being frozen by fear. Property investment does involve "calculated risk" and if you can't stomach risk, or overcome your fears, the chances are you won't succeed. Not everyone is suited to property investment, says Church.
It's also highly useful for the prospective property investor to watch what experienced players in the "industry" are doing. Why would you be buying, if they're getting rid of non-performers, and getting themselves "cashed up" and ready to snap up bargains should the market turn.
Not everyone thinks the market is going to turn by any stretch of the imagination. But some investors have used the price rises over the past year to sell down a few properties, take the profits and lower their overall debt burden, thus increasing their regular cash flow.
Getting yourself "training in the trade" of property investment makes a lot of sense. There is no lack of books on the subject, which can be bought online through specialist financial bookshops. It's not at all uncommon for investors to get started by attending a seminar or two, but beware of those run by companies that sell or develop property and those that want to sell you additional services such as mentoring.
Having said that, if you prefer the one-to-one approach, then engaging the services of a mentor or coach could be very worthwhile. Prices of seminars, coaches and mentors vary hugely and you're not guaranteed a better education by spending more, says Church.
Networking is also valuable and joining a local property investing association and attending regular meetings is a great way to do it.
Other people prefer to frequent online forums such as Landlords.co.nz and Propertytalk.co.nz, both of which are packed full of experienced investors discussing the finer points of the business.
"There is much more to property investment [than learning the basics]," says Church. "Investors really need to immerse themselves with people who are actually doing it and can answer their questions."
Seven Steps
Seven basic steps to successful property investment:
1. Write a property investment plan in order to understand your goals.
2. Organise finance early so you know how much you have to spend and don't overburden yourself with debt.
3. Find the right property with strong sustainable rental income, resale demand and good potential capital growth.
4. Get a good property lawyer to avoid the legal pitfalls, of which there are many.
5. Make sure you understand the tax issues before getting into property and find a specialist accountant.
6. Protect your investments with rental insurance, income protection insurance and mortgage protection insurance.
7. Decide if you're going to be a "landlord" and manage your own properties or an "investor" and outsource the management.
Source: Ashley Church: CEO APIA
