Profitable property investment is not a case of buying any property at any price and then just waiting for the gold bars to fall out of the sky. As in any business investment you need to plan for the best possible return at the lowest possible price.
Having decided what role you will play in the property market, you need to give some thought to how you would measure up a potential property purchase. This is an individual decision based on your own location, skills and resources. For a budding residential landlord a suitable set of rules might be:
- Avoid one industry towns
- Avoid towns with less than 20,000 inhabitants
- Avoid towns where there are a significant number of empty shops in the main street
- Avoid properties that require a significant amount of work before they can be rented and start earning you money
By setting up your own rules along similar lines you are then able to skim through the large numbers of properties that are currently being offered on the market and can immediately discard almost all of them as being unsuitable candidates for your attention, and do that without wasting any further time. What you are seeking are the few – the very few – that will help you get to where you want to go.
In the market, there are two fundamentally different types of property: those that will achieve significant capital gains and those that will give healthy returns on the investment. Sure, we all look for something that will give both benefits, but such a find is indeed very rare. The economic reality is that a one million dollar property will not rent for the same return as two half-million dollar properties.
When we are young, when we have many years of paid work ahead of us, and when the capital value tomorrow is more attractive than income today, yes we can chase that elusive gain. However, in our later years our thoughts turn to cash income today. You cannot carve off a bit of capital gain to buy this week’s groceries or pay for that year’s overseas trip. Income is King.
Do not buy in haste. Not every time is the right time to buy. The right time is when the property market, the financial markets and your own capabilities all line up. Most of the time they do not. The right time comes along infrequently, and can appear and then disappear in just a few months.
The secret to good buying is to be prepared and ready to act when the right time does arrive.
While you wait you can educate yourself. Read wisely and widely. Keep abreast in the changes around you. Stay aware of what is happening in politics, in technology, in the financial markets and in current affairs. All of these movements affect the housing and property markets to some degree. Even the weather can influence industries such as tourism and farming, with resultant impacts on how and where people live and spend. Political decisions can affect the property markets in some towns – banning further mining exploration has had a dampening effect in New Plymouth, and as left-leaning Governments tend to expand the civil service so then the Wellington property market booms.
How are you going to finance the purchase? Most buyers plan on paying a cash deposit plus the balance with a mortgage but there is nothing actually wrong with paying 100% cash for your investment property purchase. I have done so, and done so more than once. At other times I have borrowed 100% of the purchase price. It all depends on the needs of your own personal plan and on the current state of the markets. To maximise you income from the properties you need to minimise your expenses, and this includes minimising the mortgage interest you pay.
Trying to time the market is a challenge, but with intelligence, insight and education you can get a pretty fair idea of the state of the markets right now, and then it is a matter of making an informed judgement about what is going to happen over the next few years.
All properties are different; no two are identical. Even neighbouring houses differ in location if in nothing else. When you buy you are making a unique decision, it can be a lonely and worrying time. However, if you can know the answer to the question “What’s in this for me?” then the knowledge that this deal another step towards attaining your goal does help greatly to calm the nerves.
Peter is an established long-term Auckland residential landlord. He is also active in providing tenancy advice to the North Shore Citizens Advice Bureau and works within various property investment associations. He is not a certified financial planner or an accountant.