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.
Not doing the numbers
Property consultant Lisa Dudson, author of The New Zealand Property Guide, 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.”
There are a lot of active people in the market, and many of those people do 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 purchasing 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.” David Whitburn, director of Fuzo Property 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.”