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Property: Do The Numbers Still Stack Up?

It’s getting harder to be a landlord, with a raft of new rules, and a slowing housing market hitting house values. But is it still worth it? Amy Hamilton Chadwick investigates.

11 October 2021

Flat market, extra costs, and more regulations. Is rental property investment in the too-hard basket right now? For decades, buying a rental has been a back-up retirement savings plan for Kiwi families who have a bit of money to spare.

However, the Government and the Reserve Bank have put a number of hurdles in front of residential property investors, as they try to make the banking and property sectors safer.

Some investors got out

The upshot is that fewer investors are buying properties, CoreLogic data shows. “Investor share of the [new mortgage] market peaked midway through 2015 and dropped to its lowest point at the end of 2017,” says Nick Goodall, CoreLogic’s head of research.

“Since then, we’ve seen a gradual return to the market, but investor activity remains a long way off its former highs.” That’s probably been a positive change, says Tony Alexander, chief economist at BNZ.

“We’re in a phase of the property cycle where the fly-by-nightery, quick-capital-gain investors are being weeded out,” Alexander says. “With those opportunistic people out of the market, we’re left with a more professional core of investors.”

Full-time investor

Rachel Ward has been working full time as a property investor and trader in Hamilton since leaving teaching in 2011. New regulations have made her job tougher and sometimes left her feeling frustrated, although she supports some of the new Healthy Homes Standards.

For her, the biggest problem has been the Reserve Bank’s investor deposit rules. At one stage investors needed as much as a 40 per cent deposit, although now that’s down to 30 per cent.

Meanwhile, Ward still has to face the day-to-day hassles of dealing with tenants. She says to make money on property, you need to treat it like a business.

Research your market, don’t overpay, and make sure your property earns at least as much as it costs.

“Even with problems, property stacks up for me because I can add massive value through renovations. If you’re prepared to work hard in the weekends and evenings, you’ll get ahead – and you can’t do that with shares.

“I’m surprised more people don’t do it, because it certainly doesn’t stack up leaving your money in the bank.”

The magic of leverage

One factor means property can still stack up. It enjoys an enormous advantage over other asset classes – ‘leverage’, which is using borrowed money to magnify your investment results.

Banks will lend against property usually far more readily and generously than they’ll lend against shares or small businesses.

“Property only increases in value slightly above inflation. In the absence of leverage, property is not a great investment,” says Ben Brinkerhoff, authorised financial adviser and head of partner firm services at Consilium.

He says: “With tax benefits, leverage and skill, you can make money. “As with any small business, if I take it seriously, I can apply skill, hard work and my own common sense to do it better than other people and reap the rewards.”

Add together leverage, elbow grease, and good decisions, and you can make property appealing enough to potentially offset the new regulations.

Factor in the new rules

Alexander says landlords just need to adjust their calculations to take the new rules into account, in the same way business owners in any industry need to adjust to changing legislation.

He says there’s some pressure on landlords, but low interest rates make home loans comparatively cheap. And our strong economy means a rising population, solid job growth, and a continuing shortage of houses boost demand for rentals.

It’s all about you

But Alexander says it’s more about you than the state of the market when it comes to how successful you’ll be.

“We never think that rule changes will decimate the primary or manufacturing industries, so there’s no reason to think they would decimate residential property investing.

“It’s the quality of the investor that is the key determinant of success, not house prices or market conditions.

You’ve got to be professional and follow the rules.” If you don’t want to be a small-business owner, spending your spare time learning more about property investment and improving your rentals, it may pay to stick to a less stressful investment – maybe a managed investment fund. But if you want to take advantage of the power of leverage, and you’re prepared to work hard and adapt to changes, rentals can still add up to a solid long-term investment strategy for many people.

Published 28 November 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.


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