Investing made easy: Taking heed of the past
Taking heed of past lessons will help your future success, in the last of the Investing made easy series from ANZ.
Thursday, January 14th 2010, 9:57AM
by Sonia Speedy
The residential property market and the New Zealand economy are starting to show signs of renewed vigour. But as we head into a new year and potentially a new stage in the economic cycle, property investors need to hold fast to the basic rules that the recent slump has so sharply reminded us of.
Tread with care
Things may be looking up, but the economy and housing market are still finding their footing.
"We're unlikely to return to the previous bull market and I think it's really important for investors to get their heads around that," Craig Moffat, ANZ general manager of specialist distribution, says of the property market.
He adds that while things are improving, recent price lifts have centred on a shortage of listings, rather than being the result of more robust drivers.
Gareth Kiernan, managing director of economic information firm Infometrics, is upbeat about the property market over the next year to two years, but is also not predicting a return to the 20% a year growth seen a few years ago.
"We see potential for prices to be rising at double digit growth rates - 10% to 12% next year, just on the basis that you've had a very low interest rate stimulating the market and the fact there is a lot of competition out there for properties amongst buyers at the moment," he says.
But there are several unknowns circling the market. While interest rates are likely to go only one way in the near future - up, we do not know when and by how much. Talk of changes around the tax treatment of property is another concern.
"That's the big unknown at the moment," Kiernan says.
"If there is any risk to our reasonably upbeat outlook for the next year, that is potentially it, because I think something will happen," he says.
These uncertainties make it important for investors not to stretch themselves too much, Dan Lowe, an associate with accountancy firm Grant Thornton Auckland says.
"If you're just covering things because of (tax) refunds and because of the current interest rates, it can come unhinged pretty quickly if either of these things change," he says.
Recapping the basics of success
Planning is everything. Knowing what you want to achieve and how you're going to get there is vital and best achieved by working backwards from your end goal: whether it is retiring with a passive income of $50,000 or owning 10 rental properties before your 40th birthday. Staying informed of developments in the market is also important.
"The good investors that we see have a very good handle on their cash flow," Moffat says.
"They can usually produce it for you if you ask and it is usually well prepared. They are the ones that say, I'm in this for the long term and I'm prepared in terms of knowing when the peaks and troughs are coming."
Being well prepared means planning for unforeseen events too. This includes doing your numbers based on interest rates being significantly higher than they are now and allowing for things like vacancy periods. Banks typically only take 75% of rental income into account when making lending decisions, to allow for the likes of vacancy periods and other associated property costs.
Moffat suggests investors should have a "reservoir" of money set aside to buffer them from the unexpected - whether built up in savings or by topping up the mortgage to provide some wriggle-room.
No "I" in team
Creating a team of strong expert advisers around you is a key building block for success. Your accountant, solicitor, real estate agent, valuer, property manager, financial adviser, tradespeople and bank manager can all offer vital insights and help ensure your plans are feasible and that risk is minimised.
"People need advice from appropriate professionals," says Lowe.
However, he warns investors should take care to ensure the advice they take onboard is from independent and impartial parties. Use your advisers to garner advice on the best way to structure your investments and on the overall composition of your investment portfolio.
Lowe warns: "Tax should flavour a decision about whether rental property is appropriate for a particular person, but the law is subject to change at any time - reliance shouldn't be placed upon it."
He adds that "prudent" investors spread their investment strategy across a range of investment vehicles.
"Be it shares, fixed term interest bonds, or property - and even splitting it between residential and commercial property as well, because they have different risk elements," Lowe says.
Joining a property investors' association can be a good way to learn more about investing and to find contacts for reputable professionals and tradespeople.
"The networking element is probably the most important part about it, being able to actually ask fellow investors what they're doing," says Alistair Gillespie, president of the Capital Property Investors' Association.
Building up your portfolio
Growing a portfolio from one or two properties to much more, is all about adding value to help create the equity needed to buy again.
Look to add value by making renovations that will increase the rental return and that will encourage tenants to stay long term. Remember cash flow is key for you and the bank; work towards properties becoming cash flow positive as soon as possible. Reducing your reliance on income from outside the property is increasingly important as a portfolio becomes more substantial.
Forming partnerships with friends and family to enable you to find the equity to grow is another option - but seek advice on this, particularly on structuring such an arrangement. Remember to be patient and know your limits: buying rapidly means borrowing rapidly.
"As you build your portfolio the risks get even more significant. One domino falls and you can find yourself in a lot of trouble," Moffat says.
Investors also need to determine whether they are the right people to manage properties themselves, or should employ property managers, Gillespie suggests. Time and thought needs to go into the processes investors will use for managing their properties - be it tenant selection, dealing with unpaid rent, or anything else.
Having an exit strategy is also important - and don't forget to factor in things like agent fees and any mortgage break costs.
Gillespie stresses the importance of considering property investment as a business - not just a hobby.
"Anybody that goes into it thinking it's a game or a pastime, they're not doing themselves any favours; they're not doing their tenants any favours," he says.
"It is a business and has got to be run as a business."
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