Liz Koh: Don't believe the property investment hype
OPINION: It's a well-proven fact that Kiwis love investing in property.
By global standards we have a moderately high rate of home-ownership (around 65 per cent), however not so high that there aren't opportunities to be landlords.
With home ownership rates declining alongside reduced investment in public housing, the implication is that more Mums and Dads are buying multiple properties.
Owning a family home does not, however, constitute sufficient "training" for becoming a property investor.
READ MORE: Top 10 mistakes Kiwi property investors make
Yes, it is possible to generate significant wealth from property but for every successful property investor, there is another who has tried and failed.
Lack of understanding of property investment is evident in the following myths which have led would-be investors astray:
My family home will make a great rental property when I move to my next house
Possible but unlikely. When you own a rental property over the long term, you make money from rent and capital gain. The annual rental income divided by the market value of the property is the income yield. Typically, a mid-priced family home has a low income yield.
That's because the rent that tenants are willing to pay for accommodation falls within a relatively narrow range and does not go up in proportion to the value of a property. Properties at the lower end of market value tend to have a higher income yield than properties at the high end of the market. However, often the reverse is true for capital gain. Properties of mid-range value have neither a good income yield nor good capital gain when compared with low or high value properties.
Retaining your family home as a rental can also create tax inefficiencies. Usually, interest on funds borrowed to buy a rental property is deductible against the rental income. If you put tenants in your home and borrow funds to buy another house to live in, the interest on the additional borrowed funds will probably not be deductible against your rental income.
I should pay off the mortgage on my rental property as soon as possible
That depends. If you still have a mortgage on your own home, and the interest on the rental property is tax deductible, then your goal should be to make minimal payments (preferably interest-only) on the investment mortgage and use all spare funds to pay off the mortgage on your own home as fast as possible. Of course, this approach requires the discipline to not keep re-mortgaging your own home.
It's not possible to make money out of property when house prices are falling
Not true. Astute property investors can make money out of property at any point in the property cycle. It is just a question of having the right strategy for the market conditions.
Anybody can make money from property when prices are rising fast, but it takes a shrewd investor to be prepared for the turning points and to adapt to the falls. As with any investment class, a falling market is an opportunity to find bargains.
When I retire, the income from my rental property will fund my retirement goals
Think again. Investing in property is a great way to grow your wealth before retirement.
However, once you are in retirement, there are several negative factors that make property less desirable as a means of funding your goals. Unless you have a large portfolio of property, the rental income you receive, less all the expenses and tax, may not be enough to supplement your income. You are not able to access your capital without either selling or mortgaging the property, so if you choose to retain it, the wealth you have grown will not be spent by you but by the beneficiaries of your estate.
Properties require maintenance over the long term and every now and then you may have big expenses for major items such as roofing, exterior painting, interior decoration and so on. Unless you hold back some of the income, this may cause financial pressure. As you get older, you can probably do without the hassles of being a landlord.
There are great gains to be had from investing in property, but invest time in gaining knowledge before you invest in your first rental property.
* Liz Koh is an authorised financial adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.