Insider guide to investing in rental property

Hamilton and Wellington may provide better opportunities for residential property investors than either Auckland or Christchurch, in spite of the housing shortages and soaring rents in the northern and southern cities.

Figures from the Real Estate Institute of New Zealand show the median rents in many parts of Auckland and Christchurch had increased by more than 10 per cent in October compared with October last year.

While that may benefit landlords with existing properties, investors wanting to add to their portfolios in those cities may find slim pickings, because property prices had generally risen faster than rents, making it harder for them to get an acceptable return on their investment.

But in Hamilton the reverse was true in many parts of the city, with rents rising faster than property prices, providing landlords with better rental yields on their investments.

REINZ figures show that the median selling price of properties sold in Hamilton in October was up five per cent on October last year.

However, the median rent for two bedroom properties in the city's eastern and central suburbs increased by nine per cent and 8.5 per cent respectively over the same period.

But the city's northern and western suburbs, where three bedroom homes are the most common type of rental, may not be so attractive to invetsors because median rents for three bedroom homes in those areas increased by less than one per cent in the year to October.

Wellington may also be relatively attractive to investors because the property market there was more stable, and while there was comparatively little rental growth, property selling prices weren't rising strongly either, making it easier for investors to find properties providing a decent return.

Median rents increased by less than five per cent in most parts of the Wellington region, while the median price in the region increased by just half a per cent over the same period.

That's good news for property investors looking to grow their portfolios because its suggests properties coming on to the market should be providing improving rental yields (the gross return a year's rent would provide as a percentage of the purchase price).

Kate Shiels-Reddin, the business development manager of Harcourts Channel Rentals, one of Wellington's largest property management businesses, said that overall rents were largely flat in popular areas such the Hutt Valley.

Landlords were not expecting much rental growth in the near future because the supply and demand for properties to rent was largely in balance, she said.

"They see things aren't moving up much and as long as they can maintain the rents they are getting they seem to be happy," she said.

And relatively stable prices were encouraging some investors to buy more properties.

"I don't think prices have gone up so much that they won't get a good return. People are still adding to their portfolios," Shiels-Reddin said.

The REINZ figures suggest one of the best places to look for an investment property could be Upper Hutt, because the median rent in the suburb was up 4.3 per cent for the year while the median selling price was down by 10.7 per cent.

In Wellington's CBD suburbs, where the market is dominated by apartments, conditions were slightly less favourable, with the median rent for a two bedroom property down $5 a week (one per cent) in October compared with the previous year, while the median selling price increased by three per cent.

Shiels-Reddin said the recent earthquakes in the city had made some tenants a bit nervous about renting apartments in high rise blocks, but they were still popular with professional people working in the CBD and readily found tenants.

None of the properties Channel Rentals managed suffered any significant damage as a result of the quakes, she said.

The market conditions in Wellington could have investors in Auckland and Christchurch salivating.

Both cities have housing shortages and in some of their popular suburbs, rents are up more than 10 per cent for the year.

However, property prices in the same suburbs had risen faster. in some cases by more than 20 per cent for the year.

Chris Kennedy, the business development manager for Harcourts in Christchurch, said much of the increase in rents in the city was being driven by what he called the "casual let" market.

These were people who were not long term tenants, but who needed to rent a home for a few months while their own earthquake damaged home was being repaired.

Landlords would generally charge a premium for a short term rental, and tenants would be prepared to pay it because they knew it wouldn't be forever.

And that was pushing up rents strongly, with the median rent up by 17 per cent on a year ago in poplar suburbs such as Cashmere and Riccarton.

But price rises of 20 per cent or more in the same suburbs left slim pickings for investors wanting to add to their portfolios.

Getting decent returns from new homes could be just as difficult.

"We're not seeing a huge amount of new builds [as investments] because of the cost," Kennedy said.

"Some people are talking costs of $1800 to $2000 per square metre to build new.

"You can build for slightly less than that, but you are still buying a 130-160 square metre, three bedroom home for between $450,000 and $550,000 depending on its location and fitout.

And those properties are probably becoming a bit marginal in terms of their [rental] returns."

However, some investors might be prepared to accept lower returns in the hope of making a capital gain further down the track.

"I suppose there's two sides to it," Kennedy said.

"There's the savvy investor who just buys for [rental] return, and then there's the investor who buys and factors in some long term capital gain."

A recent trend in the city had been for well heeled investors to buy uninsured, earthquake damaged homes.

These were homes that were put up for sale after their owners had received an insurance payout on them.

Once an insurance payout has been made, the home becomes uninsured and because of that, banks won't be willing to provide a mortgage to purchase them.

That restricted the pool of potential buyers for such properties to people who could pay cash to buy them and fix them up.

Some of the homes were still in a liveable state, but as well having sufficient cash, potential; investors would need to be able to estimate the cost of fixing them up and how much they would rent for once that was done.

That was adding some new rental stock to the market, Kennedy said.

However he expected the upward pressure on rents to remain in the coming year, because of the imbalance between supply and demand.

The overall vacancy rate for the rental properties managed by Harcourts in Christchurch was just 1.5 per cent in the second quarter of this year, he said.

Further upward pressure on rents in popular Auckland suburbs was also likely to continue in the new year.

Median rents in Auckland's inner city suburbs such as Ponsonby, Grey Lynn and Kingsland were up 10 per cent in October compared with a year earlier.

REINZ chief executive Helen O'Sullivan said some of the pressure on rents was driven by what she described as "rental displacement."

That's where properties that had been rented were sold to owner-occupiers as their family home, which reduced the pool of available rental properties, keeping the pressure on rents.

Fairfax Media