Building New vs Buying Old

The New Zealand tax system is a complicated beast. Even your accountant will only know a fraction of what it entails. Fortunately, there are industry specialists out there who are happy to share their knowledge of the property rules, and there are some highly profitable tricks of the trade to be taken advantage of.

Our friends at OPES Partners specialise in property investment financial advice, and were kind enough to share this great example of why building a new rental property can be more affordable the an older house of the same price.

"At OPES we focus on quality investment properties, which is typically achieved through new or near new properties. Generally these types of properties have less risk associated with them, due to lower maintenance and less vacancy. In addition, cashflow is often far better once tax has been taken into account."

Below is a cashflow example for two properties, one old with a higher rent, but slightly higher vacancy and maintenance, compared to a new property.

	Older Property	New Property
Purchase price	$450,000	$450,000
Investment mortgage	$453,500	$453,500
Rental income	$550 per week	$500 per week
Vacancy	7.50%	5.00%
Interest at 6%	$27,210	$27,210
Property management at 7.50%	$1,984	$1,853
Rates	$2,200	$2,200
Insurance	$1,100	$1,100
Maintenance	$1,000	$500
Accounting	$1,000	$1,000
Chattel value	$10,000	$49,500
Cost per week (after tax credit)*	$93	$55

OPES Partners provide personal property investment advice, free of charge for qualifying applicants. Read their past client's testimonials, and find out more about their service at www.opespartners.co.nz

Free Stuff To Get You Started

In this highly competitive world we live in today, companies are offering all sorts of incentives to their customers, in a bid to win them over. The good news for us is, this means a whole lot of freebies on offer, if you know where to look. 

Below we’ve shared some of the best FREE tools and services on offer, to help build your property portfolio.

OPES Partners - A great first step for anyone thinking about saving for retirement through investment property. OPES have registered financial advisors who will come to your door, look at your personal finances, offer investment advice, structure your taxes efficiently, and basically hold your hand through the entire process of purchasing your first rental property.

New Zealand Home Loans - This is a money-saving service for anyone who has a mortgage. NZ Home Loans will restructure your mortgage to ensure you’re not paying more than you should be. Best of all, they’re paid by the banks, so it’s all free, baby!

Mortgage Calculators - Most banks offer mortgage calculators on their websites. They’re great for getting a rough idea of how much you can borrow, or how much your repayments might be. We recommend Westpac’s property investment calculator for a more in-depth analysis of a particular property as a viable investment, as it takes information such as capital gains, rental income and chattel depreciation into account. Check it out here… http://www.westpac.co.nz/home-loans/calculators/property-investment-calculator/

Q&A - If you’re already a landlord, and managing the property yourself, www.landlords.co.nz have a questions & answers service which is sponsored by industry experts. 

http://www.landlords.co.nz/ask-an-expert

Seminars - There are often free seminars happening around Wellington and it’s definitely worth attending at least one of them. They can be really motivating, and often explain property investment in very simple terms. Stay tuned to Wellington Property Investors Club’s Facebook Page, for updates on the next seminar near you. The best ones will usually offer free food and drink too!

Information - It’s everywhere! The important thing is to get the basics right, and get advice from the right people. At Wellington Property Investors Club, we aim to weed out the junk, to deliver only what’s really important to know, without over-complicating things. Here are a few of our favourite information tools which might come in handy:

TradeMe Price Index - For the latest sales and rent statistics broken down by region. http://www.trademe.co.nz/property/price-index/

Zoodle - Offers free property information, including useful summaries of Wellington suburbs, relevant school zones, and house/land sizes. NB: More specific property information can come at a cost.

http://www.zoodle.co.nz/search/wellington

Wellington City Council - Find out the government valuation of any property you’re interested in. Rates valuations can be useful as a rough guide in determining a property's market value, but be conscious that they can also be vastly inaccurate occasionally.

http://wellington.govt.nz/services/rates-and-property/property/property-search

Rental Appraisals - Most property managers will give you a free rental appraisal in an effort to gain your business. 

Brokers - Why would you do the running around looking for the best insurance or finance deal, when there are brokers who will do it for you, and don’t charge you a cent? Using a broker is much easier, and often their network of suppliers will deliver a more competitive price for you. 

Wellington Property Investors Club - This online club is industry funded to provide free information and services for anyone new to property investment. Sign up to many of the services mentioned above, and more, and the WPIC will put you in touch with our recommended providers, who have agreed to provide their services at no cost to our members and fans.

http://goo.gl/forms/5ptJp5AriR                  

Common Myths of Property Investment

Being an avid property investor, I've struggled to understand why I encounter so many people who have enough equity in their family home, but haven't bought a rental property. To me it seems like wasted opportunity that makes little sense, but once I started paying attention to peoples reasoning, I noticed five common misconceptions that can hold people back, and I aim to dispel those myths in simple terms below...

1) "It’s too expensive" - We’ve all seen property prices increasing year on year, to the point it seems unaffordable to own more than one home. It is true that saving for a 20% deposit on your first house can be extremely difficult, but once you’re on the property ladder, it gets a whole lot easier, because that’s when your existing property starts to build your next deposit.

For example, New Zealand house prices have risen 35% in the last five years. A first home bought in 2010 for $350,000 would now be worth $472,000, meaning the owner would have the equivalent of a $122,000 deposit for house number two, without saving a cent.

2) "You only average 6% return on investment (ROI)" - While it is true that property prices have averaged a 6% per annum gain in the last 25 years, this is not an accurate reflection of ROI, because a sensible property investor would use the bank’s money, rather than her own.

For example, a $500,000 house increasing in value by $30,000 is a 6% gain, but if you borrowed 80% of the house value, you’ve actually grossed $30,000 from a $100,000 investment, or 30% ROI. 

3) "The aim is to pay off your debt" - Many people look at a 30 year mortgage as a huge interest cost, but a savvy investor knows that the ROI is usually much greater than the interest rate, so more debt equals more profit.

For example, the aforementioned $530,000 house with a $400,000 mortgage at 7% interest would cost $28,000 per year, but after rental income the net cost is reduced to $4,000 per year (1%). This leaves an actual ROI of $26,000 from the $104,000 invested (25% Net ROI). 

4) "It’s all about getting high rents" - Chasing high rent is not the way to build your wealth. It helps, sure, but not if it’s at the expense of  capital growth (the increase in your property’s value).

For example - A $450,000 house that costs $50 per week but increases in value by 6%pa, is a far better long term investment than an apartment that earns you $50 per week rent , but only increases in value by 3%pa. Here are the numbers after 10 years...

House profit = $356,000 growth - $26,000 costs = $330,000
Apartment profit = $155,000 growth + $26,000 = $181,000

5) "It’s the wrong time to buy" - Nobody can accurately predict what the property market will do in the short term, but it doesn’t actually matter. Property investment is a long term game, and history suggests that over the long term, property prices will reliably increase.

For example - If you buy a property today that is worth $10% less tomorrow, you are unlikely to notice any real change, provided you hold onto the property until prices increase again. When the house is worth twice as much in 10 years, you’ll be glad you did.

Cities With Growth Potential – Christchurch and Wellington

Christchurch & Wellington property prices have been trailing behind the growth experienced in Auckland since 2011, which has created a significant price gap between the two cities, to a degree that has never been seen before. This could indicate Christchurch & Wellington prices will increase over the next few years, while the national balance is restored.

New Zealand housing is a national market, so while we can look to the usual indicators such as net immigration, rent prices and building consents to make short term regional predictions, the basic overriding economic principal of supply and demand will eventually play out, and with that comes the effects of competition, so the long term pattern shown since 1992 should remain true in the future.

In other words, Christchurch & Wellington housing is competition for Auckland, and provides a healthy alternative for those comparing property investment options between the three main cities. As more and more are priced out of the Auckland market, they will look to these substitutes instead.

There are two things that could happen to close the gap. Christchurch & Wellington prices go up, or Auckland prices go down. The latter seems unlikely, due to Kiwi investors’ reluctance to lose money. History suggests we merely hold onto our property in less prosperous times, rather than selling at a loss. To the most part, we see fewer sales in those conditions, but not lower prices.

If you’re playing the long game, which is the safest strategy for a normal Kiwi family, Christchurch & Wellington have massive growth potential now, so could be the cities to buy in right now.