Top 10 mistakes Kiwi property investors make
Some of New Zealand's top property investment experts say there are a number of common mistakes Kiwi landlords keep making.
Whether you're a new investor or have a few properties in your portfolio, avoiding these pitfalls will help you reach your goals more quickly.
Believing property investment will solve all your financial problems
Property consultant Lisa Dudson, author of the New Zealand Property Guide, said many investors had too simplistic an outlook.
"Just because you own property, it doesn't mean you will automatically be wealthy and be able to retire comfortably."
She said it was important not to expect to be able to make a lot of money overnight by doing nothing.
"People get caught up in how much money they can make and don't realise the amount of work you have to put in."
Not doing the numbers
Dudson has seen many people spend hundreds of thousands of dollars on a property without first doing any analysis of the deal.
"They don't think about what the cashflow will be, what the deal will do for their financial positions, whether it will be positive or negative, or what other costs will be included."
David Whitburn, project manager at Fuzo Property, said many people did not know the difference between the gross yield of a property - a basic calculation of the rent coming in as a percentage of the purchase price - and the net yield - what they would earn after all the costs were taken into account.
Costs could easily make the difference between a purchase being a good opportunity or a long-term drain on finances.
Property commentator Olly Newland said he often encountered people who were stuck in "empire building" mode.
"They get carried away by the number of properties they own and think they are the emperor of a kingdom or something, but the properties are producing no income."
Not understanding the risks
People get tripped up by their belief that property prices only ever go up.
Dudson said it was important for property investors to know there were risks.
"Most can be minimised but you have to know what they are."
She said one example was leverage, which boosts returns when used well. Property investors have access to much more leverage than investors in many other asset classes.
Investors outside Auckland can buy a $500,000 property with just $100,000 deposit and benefit from the gains of the full $500,000 investment.
If prices move up 5 per cent in a year, their $100,000 deposit becomes equity of $125,000, rather than just $105,000 if there was no leverage.
But leverage also intensifies risk. If prices dropped 10 per cent, the house would be worth $450,000 and half their initial deposit and equity would be gone.
Not getting advice
Property investors can avoid mistakes by learning from those who have already seen others make them.
Dudson said all property investors should have an accountant with experience in property investment, a property mentor or a financial adviser to talk to.
Local property investors associations can be help.
Dudson said it was important to have a plan and review it regularly.
"I see people cross their fingers and hope everything will be fine. You need to be constantly looking at what you are doing and why."
Whitburn said those who were getting started should talk to a lawyer and accountant to get the right ownership structure in place.
He said many people bought properties in trusts when they did not need to, or had look-through companies when they should have bought as a partnership.
"Trusts are great for asset protection but bad for tax efficiency. If the property is making losses, they get stuck there."
Thinking finance is just about getting a loan
Getting the money in the bank to buy a property is the easy bit, Dudson said.
Many people did not think about how they structured their mortgages, whether they should be principal and interest, interest only, or revolving credit.
She said a mortgage broker with property investment advice would help.
Whitburn said revolving credit accounts were good for property investors because rent payments could come in and immediately offset the interest accruing on a loan.
"It's better than having the money in a cheque account and having to sweep it across.
But some people have a look-through company with a revolving credit account and they go out using it for groceries or a ski trip, when they are audited or it comes to tax time, it's an absolute nightmare."
He suggested investors fix parts of their loans on different terms, such as some floating, some fixed for a year, two years and three years, so they would come up for renewal at staggered intervals.
"It smooths out the interest expense and means you can avail yourself of opportunities when low interest rates are offered."
Newland cautioned against borrowing too heavily on your own home.
"You shouldn't borrow more than the rent from the property will cover."
Not managing the property well
Dudson said few investors were capable of managing their own properties.
Many would end up not putting rents up often enough or not knowing how to deal with problem tenants.
"You hear 'they're such a nice person...' but then the tenant doesn't pay, you get caught and before you know it you're $3000 in arrears."
Whitburn said investors should ensure they had enough money aside to cover repairs and maintenance, and keep on top of it.
"Don't skimp because you end up with worse tenants and it leaves you losing money and time, it costs more in the long run."
Not doing due diligence
Whitburn has seen investors buy leaky buildings, paying full market price, or buy leasehold properties not understanding the terms of the lease.
People also needed to understand the body corporate agreements of any properties they bought and any potential problems that could arise.
It was becoming harder to do enough research pre-purchase, because more and more properties are being sold at auction, he said.
"They don't have time to do due diligence. I see people bidding too much at auction, they let their emotions get in the way because they have been looking for six months and never get there so they don't set a maximum they will bid, they just want to win it."
Only being interested when the market is hot
A lot of people decide to become property investors when house prices are rising.
Dudson said that was the wrong approach to take.
"In reality, you should have been buying three or four years ago. When it is doom and gloom, that is when you should be buying."
Not understanding the difference between a home and an investment property
Just because you own your own home, do not assume you know enough about property to become a landlord.
Your purchase will need to be driven by things such as the numbers, the ongoing maintenance required of the property and the local rental market - not how attractive the garden or kitchen is.
And that old adage about only buying investment properties you would want to live in yourself?
Dudson says it is mad. "I doubt I'd live in any of the investment properties I own because they aren't where I want to live, how I want to live."
Buying in the wrong location
Whitburn says he is still dealing with people who bought properties at the peak of the last boom in parts of New Zealand where prices have not yet recovered.
"Make sure you are not over-exposed to towns. They can have big upswings if industry or infrastructure is put there but it is not a sure bet."
Tokoroa is a popular investment spot because investors can buy properties for $100,000 but Whitburn expected the capital gains to be limited.
"Somewhere that costs $75,000 and rents for $200 a week looks like a good yield until you consider that it might not be tenanted 52 weeks a year because it could be heard to find tenants.
"Insurance costs the same as in a bigger town, repair costs are higher and there are no economies of scale in rates. If interest rates rise, your property can become cashflow neutral or negative quite quickly."
He urged investors to look for places where there was population growth, infrastructure and employment.
"You've got to invest in those locations for growth. It helps people get the next deposit and keeps cashflow robust."