It’s Time to Sort Out the Myths
Investing in property can be risky and rewarding. Amy Hamilton Chadwick seeks clarity from the experts far away from the dinner table chatter.
8 March 2023
Property is always a hot topic of conversation in New Zealand – sometimes it seems that everyone who lives in a house thinks they’re an expert on the property market.
You’ll hear people repeat all kinds of information, whether that’s doom and gloom, unfounded optimism, or unregulated financial advice. Add to that the panic-filled media reporting that lurches from crisis to crisis, and it’s no wonder myths about property are widespread.
Investing in property can be risky and rewarding, and it’s important to go in with your eyes wide open. You don’t want to be misled by some of the common misconceptions that you’ll hear around the BBQ – so here are five big property myths, set straight by experts.
Myth No.1: There’s no money to be made in property right now
Prices are dropping, rents aren’t keeping up – surely this is a terrible time to buy property? Only if you have a very short-term view of investing, points out Matthew Gilligan, managing director of GRA, property investor/developer, and author of Property 101.
“In the past 40 years I’ve never seen a downturn that hasn’t recovered to peak value within five years,” Gilligan says. “Reduced values are temporary. The burden of interest rates will rein in inflation, and I think we’ll see a recessionary environment in 2024. Then, in 2025, we’ll start to see recovery of values as rates drop again and demand increases. Based on historical patterns, this could be your best opportunity to get something at a discount.”
He’s certainly putting his money where his mouth is by actively investing in property. For example, he’s leading a syndicate that is currently buying properties in Rotorua. Gilligan recently bought a property for $230,000 that had been on the market for $460,000; “the overseas vendors just wanted out”. It’s on a 400m2 section and needs renovation, after which he anticipates it will rent out for around $550 a week and have a value of $430,000. Because Rotorua has been earmarked for high-density development and it’s affordable, Gilligan owns 28 sites across the city and plans to develop them once conditions are right.
“This slowdown is a bad thing if you’re on the wrong side of it, but there’s an opportunity to buy in a down market, add value, recycle your equity or sell, and keep doing it,” he says. “There are all these Doomsday stories, but if you understand the cycles, maximise your cash flow, and you have enough time in the market, you will get huge capital growth.”
Gilligan says even the most intelligent advisers don’t always see the big picture when the headlines are so dire. Financial advisers, accountants and lawyers often have an extremely low tolerance for losses.
“They’ll tell you that property is terrible and this is the worst time to invest, but they’re wrong. Smart people with high IQs don’t necessarily look at the long-term cycle.”
One factor that makes Gilligan feel more confident about the prospects for property investors is the potential for a change of government. The National Party has pledged to remove the current phase-out of rental tax deductibility if it wins the election, as well as reducing the 10-year bright-line test. This would immediately improve the climate for most residential property investors.
Overall, Gilligan says even if you’ve just bought your first home, there’s no need to be alarmed:
“Those who are sitting on houses right now who are stressed, don’t panic and sell. I think property will be worth 60 to 70 per cent more in eight years’ time – so if it’s down 30 per cent over the next two years should you sell? Not if you can afford to hold. Trust those long-term trends and understand that there’s a reversal of policy coming, those missing migrants are coming back, and this is when huge amounts of money get made.”
Myth No.2: Rent is dead money
Why pay rent? You’re just wasting your time paying off someone else’s mortgage, and you’ll struggle to keep up with your home-owning friends. But this is an idea that dates back to a time of lower house prices and a lack of access to the share market.
“There’s a legacy perception that the only way to build wealth is through property, but that’s changed,” says Dean Anderson, CEO of Kernel. “An increasing number of people want to prioritise other experiences, even simultaneously building wealth through other means such as starting a business or simple regular investing. Renting gives them flexibility to focus on this; they don’t want to deal with maintenance, insurance, rates and so on.”
Anderson also believes that KiwiSaver now provides the financial backstop that a home once represented: “Buying a home using KiwiSaver is a hit in long-term wealth – take out $50,000 today, and that could be the equivalent of a few hundred thousand in retirement.
“A home used to provide the confidence of financial security in retirement, but KiwiSaver can do this now. Those who rent can have confidence that their KiwiSaver should grow to a large financial nest egg in retirement, so I think that’s changed mindsets about renting. In the past, you knew you had a home no matter what. While home ownership will still be on the cards for most, you shouldn’t feel the same pressure to buy.”
With interest rates rising fast, but rents not accelerating as quickly, homeowners are paying more on their loans while renters have relatively more spare cash to invest. It’s been proven that renters can keep up with homeowners, or even outperform them, with a dedicated investment strategy, and that’s certainly working for Anderson. He and his partner rent in Auckland city, and they love the lock-up-and-leave convenience and the “walk everywhere” lifestyle.
“Renting is a strategic decision. I could afford to buy, but I would need to commute, and after living in Wellington for so long I’m addicted to the walking lifestyle. I’m growing my wealth in other ways, by investing in Kernel’s growth and in our funds. And, of course, buying isn’t a yes or no decision; you can always buy later. Don’t buy just for the sake of buying.”
Myth No.3: Rental property is a passive investment
Watch any young hustler on YouTube talk about how to get rich, and they’ll tell you all about why passive income allows you to live the dream – and rental property is almost always held up as a brilliant source of passive income. This gives you the impression that you buy a rental and do nothing as the money keeps flooding in, but that’s a highly misleading idea.
“It’s a very emotive thing, the idea that you don’t have to do anything at all,” says Victoria Heyes, managing director at The Rental Bureau. “It’s true that you don’t go to work and exchange hours for a wage, but if you dig into the details, the most successful property investors are very active.”
Managing a property yourself is a significant job, because you’re looking after a customer and you need to keep them happy. That can be a daily task, says Heyes, akin to running a small business. Even using a professional property manager won’t absolve you of all effort (and of course it comes at a cost).
“Good investors are constantly maintaining their properties and looking to add value to improve their return on investment,” Heyes says. “You need to be regularly renovating and always making sure the investment aligns with your goals, not just passively forgetting about it.”
Myth No.4: Equity in your home isn’t useful until you sell
Many investment experts will tell you that a home is not really an investment, because it generates no income. Similarly, when prices rise, you’ll hear people telling you that it’s no use until you sell, and even then you’re buying and selling in the same market, so your equity isn’t really much use.
However, if you know how to access it, your equity can give you a leg up into the rental property market, pay for renovations, support your kids into their first homes or even help with large expenses.
“Nowadays I would say 90 per cent of property investors are using their home equity to get started,” says Angela Webb, head of residential investment at Bayleys Canterbury. “Homeowners can use their equity by refinancing and pulling it out.”
There are several ways to do this. You can use your home as security for a second mortgage on an investment property, a strategy that Webb has used herself to help her build a strong rental portfolio.
“A lot of investors have a fear of using their own home as security. I’ve done it for years, and it works, but you’ve got to be good at managing your money.”
Another option is withdrawing your equity to use as the deposit on an investment property that is mortgaged with a different bank. This prevents the same bank from holding both properties as security. Both of these options essentially leave you with additional lending equal to the price of your rental, so it’s like having a 100 per cent loan on the rental – and you need to be prepared to service that high debt burden.
You can also set up a revolving credit facility, which can sit unused (so you pay no interest) until you need it. The beauty of revolving credit is that once it is all set up you don’t need to fill out any paperwork to explain to the bank why you’re tapping into your money. It can provide a backstop in case of emergency spending, surprise tax bills for business owners, a renovation or whatever you need it for.
“Revolving credit gives you the flexibility of paying it back as fast as possible,” says Webb, “or if you use it as a deposit on a rental, you have the option to refinance and pay it back that way.”
She also sees many people using their equity to fund their children into first homes. Your ability to use your equity this way will rely on the bank agreeing that you’re a good borrowing risk, which depends on your debt levels, age and other factors.
“I recommend you talk to a mortgage broker,” Webb adds. “My experienced brokers are great at coming up with solutions and making sure I’m protected.”
Myth No.5: Stick to what you know
Buy what you know – it’s that kind of thinking that people use to justify buying rentals in their own suburb, city or even street. It’s not exactly bad investment advice, but it’s certainly not the way to get the best returns or build the optimal portfolio. No matter how familiar you are with your suburb, unless you’ve looked at plenty of options you can’t possibly know if it’s the right choice to help you reach your investment goals.
“You need to understand your property investment goals,” says Heyes, who is a property investor herself. “If you’re after cash flow, you need to find those areas that have immediate cash flow, whereas if you’re looking for long-term capital growth you might want an area with high growth potential.”
Knowledge of an area is essential, she notes, but it needs to be from an investor’s point of view, not just your own familiarity with the local parks and cafés. Experts look around New Zealand, or even further afield, to discover which areas will suit their needs, then run the numbers. Essentially, it’s not about investing in what you know, but getting to know what it is that you should invest in for the best results. Plus, investing beyond your backyard gives you greater diversity, which reduces your exposure to the specific risks of your local area.
“Our clients include a lot of overseas investors who own properties in New Zealand, and some New Zealanders who own properties here and in Asia and the UK,” Heyes says.
“They cast their net wide, and they’ve done their research to find investments that align with their strategy. Serious investors use all the tricks of the trade. They start with software that gives you all the statistics and data about areas, then talk to local property managers, their lawyers and accountants, and they’ll use all that knowledge to make their decisions – not just whether or not there’s a good café up the road.”
Property can be part of an outstanding portfolio
Property has its advantages and disadvantages: historically, property returns are slightly lower than those from the share market, but because you can borrow to buy property, the leverage can magnify your gains. Owning a home or a rental can help you build wealth over time, but it’s not the only path to a secure financial future.
By setting long-term financial goals, getting the right advice, and thinking carefully about the risks, you can decide whether property investment is the best choice to help you reach your targets.
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