Bernard Hickey does the numbers on investing in residential rental property, and is amazed at the 'sure thing' returns on offer, especially in Auckland

By Bernard Hickey

This week I sold my house in Auckland to take advantage of the 'heat' in the market.

I'm looking to pay off the remainder of my mortgage and buy a house mortgage-free in Wellington.

This is my own personal deleveraging plan to reduce the risk of having debt and give me some more flexibility about how and when I work.

But it's not what I 'should' be doing if I was responding to the incentives currently thrown in front of me by our tax system and banking system.

Instead, I should be taking the equity out of my house, slicing it up into as many deposits as I can and spreading it across a bunch of residential or commercial rental properties in Auckland with good dollops of 80 to 95% loan to value ratio debt.

Let's do the maths.

Let's just say for argument's sake I had NZ$600,000 of equity. Brokers tell me that banks are keen to lend and would allow me to buy a couple of rental properties with 5% deposits.

I could then buy another 5 with 10% deposits, and the rest of the money could be used with 20% deposits to buy 3 more.

That would allow me to buy 10 investment properties at NZ$500,000 each for a total of NZ$5 million, including borrowings of NZ$4.4 million.

That's an average loan to value ratio of 88%.

At current interest rates of around 4.9% that would mean I'm up for NZ$215,600 a year in interest.

I'm told that if I was a clever and hard working investor that only bought three bedroom brick and tile properties in cheaper suburbs down south and out west in Auckland then I could get a cash yield after rent, rates, insurance and maintenance of around 6% or NZ$300,000 a year.

That implies rents of well over NZ$400 a week, but I'm told that's quite possible, particularly if I can get the government to pay accomodation supplements.

At current interest rates I would already be profitable in cash terms, but factor in the tax free capital gains and I would be in clover.

Capital gains are the key and at the moment there seems to be just one direction for house prices in Auckland in particular.

The Real Estate Institute's stratified measure of house prices shows prices rose 14.4% in the year to October in Auckland. If that happened again next year I would make implied capital gains of NZ$700,000 on my 10 properties, adding to the NZ$84,400 of cash profits from the rentals.

That implies of an investment return of 130% in one year on the NZ$600,000 of equity I leveraged up into rental property.

The big question, of course, is what will happen to property prices and interest rates.

Financial markets are pricing in more cuts in interest rates.

Auckland is building less than a third of the 15,000 houses a year it needs to keep up with population.

The Reserve Bank Governor has just said he wouldn't limit loan to value ratios, even if he had the ability to do it.

Why wouldn't house prices rise another 14% in that environment?

It seems like a sure thing.

All the incentives in front of me are saying gear up to buy rental property in an Auckland market with a chronic shortage of houses. They're saying I should borrow NZ$4.4 million from foreign-funded banks to boost the value of existing property.

They're saying I should increase New Zealand's foreign debt and use it to enrich myself while not employing any other New Zealanders and not paying tax on it.

So what am I waiting for? I've almost convinced myself I should do it.


This article first appeared in the Herald on Sunday. It is used here with permission.

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ohhh Bernard, you've become veyr bullish on property!
Maybe this is a sign of something amiss?
Maybe its a sign the Auckland market has well and truly entered bubble territory, with even the doomsters now convinced it's a one way bet?
Me, I'm not so sure. It looks unsustainable

Bernard is not talking the facts. He will never be able to buy $5million properties in real world unless his weekly income is really high. The bank will not lend him that amount of money with checking his service abilities.
Banks will happy to lend him moeney with two rules, deposit and service abilities. He mayb have deposit for 6 propertis but he can only buy another one or two depending on his service abiliy. When he is buying rental property, band may not be happy with 5% or 10% deposit. Call a bank broker, he/she will be able to tell the reality.
When you buy your third property, KIWI bank will class your loan as comercial loan, you can only borrorw 70% max. Bank will only calculate 75% your rent as imcome too. 
Please correct me if Im wrong.

Finance Guru?  And there I was thinking Ross was one too many.

Bernard - may I remind you that April Fools day is still several months away.
But your tongue in cheek style still makes me chuckle. 

My word that is an insightful comment

We have been mortgage free going on 25 yrs thing we ever did was live with positive numbers (no debt). The leverage can work in reverse in your favour if you start with no debt and build on that. Plus we have had huge flexibility and low stress in our financial lives.
Hundreds of thousands of dollars in interest is in our risk.
My advise is to start out small....borrow minimal and pay it off as soon as possible. And then start to invest properly.
The fact that banks income growth is higher by far than GDP growth should signal that something is amiss.
Everyone needs to do what they are comfortable with. But gambling is for gamblers.

Splineman, you are a wiseman!
We did the same as you 20 years ago, got rid of the mortgage and down shifted our lifestyle a few notches. Coming from California, the lack of stress and plenty of "elbow room" in rural NZ, was an added bonus. We lived within our means on a fixed income untill our boys got older. Now we are looking for new pastures, and we have a rather hefty nest egg on our costal property in New Zealand.
Leverage is a lot of propaganda put out by interest groups like speculators, financiers and developers, to mention just a few. We could have leveraged our capital when we first arrived here, but just like diversification, leveraging has its' downfalls. We concentrated our investment in property to a single mortgage-free dweling, and came out with flying colors thanks to the property boom experienced last decade. Our added bonus, one that is not quantifyable, was stress free living, heaps of time with our children, and an absolute lack of concern for the direction the market might take. 
Loving New Zealand,

"Back to normal".
What could possibly go wrong..

There are certain points missing in this calculation:
no rental is 100% occupied, you have always vacancies  in between - 
there can be lots of damage by tenants which normal maintenance does not cover  -
tenants leave with lots of rent in arrear and cannot be found or have no funds to recover  -
you did not allow for tax you have to pay  to IRD 33% -
by doing it professionally, when selling you have to pay tax for  capital gain -
when selling, depreciation is reclaimed (to be paid back) to IRD -
buying in cheaper suburbs, the statistical annual increase of ca.15% does not apply, statistic is skewered because high number of over 1 Mill. sales recently -
you have to employ an accountant and possibly a property manager (costing around 10% of rent gross) -
before considering a figure as gain, you have to allow for inflation increases -
I might even have missed something........

Well done for cracking the 1 mil barrier BH!All the best for the future. I assume you will putting out a revised forecast on where house prices are +15% in the next year.
I assume you write the article with tongue in cheek or to simply get the anti-property brigade hating a bit more.....if you are serious then I have a few questions:
Why did you sell if your so bullish, surely you should wait a little longer to cash out??Poor chairman moa was 6 months too early
If you have to move out of Auckland why not by 1 rental and hold onto it so you still have some exposure in the market?
Do you think your article will make people go out and buy property after Xmas? I do. Most humans are sheep.....the do what others do, follow and copy and repeat. I think you have stoked the market up :) and along with the editorial in the herald telling FHBs to get out buying in the suburbs

I know it's tongue in cheek, but boy oh boy, that's a recipe for bankruptcy Bernard!
NEVER take on more than about 60% debt unless the asset is producing a large secure income (over 16%PA net on the debt say).
So with $600k in equity, and assuming you want to spend $600k in Wellington on your own home with the equivalent of no more than 40% debt on your own home, then you really only have $240k to invest, which would allow you to gear it to $600k of investment property (of course in reality the investment property would be 100% leveraged and your home mortgage free for tax purposes).
So I would advised spending no more than $1.2m on property if you want to spend $600k on your own home.
That $600k investment would need to be something that could generate a high income and in a high capital growth area (definitely not outer suburban Auckland B&Ts).  Buying $5m of property (unless they are super bargains and super earners and you know exactly what you are doing) is financial suicide.
If for arguments sake, you did find a property in a prime big city core location where there is strong demand, and you managed to make it return say 8% net and interest rates were 5.5%, then if you would have probably achieved a one-off capital gain from buying undervalued and improving of perhaps 30%, plus if prices rise 7.5%PA for the next couple of years, you'd have about a 10%PA total return for the next 2 years, so in just 2 years time you'd have effectively seen a 50% gain on the $600k investment, ie $300k up mostly tax free.
Then of course rinse, wash and repeat...
That's a better and safer get rich quick scheme...

... if you can buy undervalued and if you can get the 8% net return.  Hard in the city core at the moment.

Kate, not only in the City core area. 
A 70's brick  2 br.unit in Onehunga sold about 4 months ago for $ 425.000.
The new owners redecorated it and installed a new bathroom, now tenanted for $ 390.- per week. Rates in this block is $ 1.600, insurance (just guess) $ 600.
52 weeks per yearX$ 390=$ 20.280 gross rental.
Without making allowance for any ongoing future maintenance, after deducting above annual expenses AND paying 33% income tax leaves net $ 12.114.-, which is  approx.3.5% from purchase price, in reality  less, as I don't know the renovation costs, which would have to be added to purchase price. Actually accounting for the interest costs of the capital employed, the result is negative.
I guess people still "investing" in property is just to escape the risks involved of losing ones money in the bank, be it by wealth erosion through inflation or the almost certainty of a crash of the worldwide debt bubble.

I'm with Chris J - 1.26pm.
If you are a blind gambler - then do what you describe Bernard - you might do very well.  But you might also soon be explaining to your loved ones the bank is repossessing the house you yourself live in - and you can only now afford to rent a hovel.
Extreme leveraging is just blind gambling.  With the potential also to destroy any asset you now have.  I blind gamble with a lotto ticket actually.  Hasn't worked out well - but I can manage the loss of $12 each week.
The leveraged plan you describe means you have no control at all.  If it goes bad you have no options.  In the past I have bought property with mortgage.  But carefully and with careful attention to being in control of the situation and only when I had other ability to deal with the variables. 

Where your answer really lies Bernard is in morality, if you really want to be a fearless and unbiased journalist then you will never have a better opportunity. Hide your wealth and you have no fear of the courts. You now have a rare opportunity in front of you. Perhaps saying time to step up and put your money where your mouth is a bit harsh but I am sure you know what I mean. 
You could further strengthen your reputation by withdrawing from the banking system and denying banks the opportunity to create money from you, or further leverage that money. The power now swings in your favour. By following the right path you put an extra nail in the coffin. 
But if you don't quite have the courage to pull that off, then I would use your position to persuade (blackmail) the banks and get a better rate. :-)

The story is obviously toungue in cheek. But the worry is that many people do/have done this, and banks have let them do it. As others have said it is high risk, so why do banks still lend at those levels? Safe as houses?

BH spoken like someone who has never invested in property. Just be thankful you have netted a decent amount of money on what sounds like a starter home...120 sq meter approaching 100 years old on a limited use section. High maintenace put in to be repeated by a future owners again in ten-fifteen amazes me what people will take on for the price to live in Auckland.
Just thank your lucky stars you get a second chance and didn't lose your shirt :-) You would have... if the Government hadn't bail the market to the degree it did (fiscally), RB with historically low discounted interest rates and China hadn't held itself up for another four is one time it would have been a bugger to be correct  :-)

Bernard you are perhaps being sarcastic here. But really, the ideas you espouse in this article, as in earlier articles, are for fools only.
Fools who believed your 'house price collapse' theories and sold up have lost tens of thousands of dollars. 
Any fools who believed the strategy you propose in this article will end up losing money too... in bankruptcy. 
There should be financial warnings posted at the top of so many of your articles.

It isnt over til the fat lady sings...
and they have not "lost" money, just not seen the paper gains v risk removal....losing is whats coming...the debt will stay.

Your Landlord - well said - and that last sentence of yours should be in capitals and bold type. 

What Bernard proposes is neither original nor unique. Such a strategy was proposed month after month in the Property Investor magazine from about 2002 through to 2007. Unfortunately most of those who proposed such a strategy were bankrupt by 2009.
However, I note that those who were saying that they were not going to buy but remain renters indefinitely have become very quiet – strange!

Q: What’s the difference between Real Estate Investors and Pigeons?
A: The Pigeons are still capable of making deposits on new BMW’s.
Q: What’s the difference between a Real Estate Investor and a large pizza?
A: A large pizza can feed a family of four.
A group of tourists were being guided through an ancient Castle in Europe.
  "This place," the guide told them, "is 600 years old. Not a stone
in it has been touched, nothing altered, nothing replaced in all those years."
  "Well," said one woman dryly, "they must have the same landlord
I have."

Another very good article BH, well done.
You give me the impression, that at heart you are a very conservative investor, and that while you might like to give it a go, your conservatism will stop you. Mind you, that is not a bad thing, as it seems to have served you well so far.
Good luck to you BH
Traditionally, the best time for buying a property is when interest rates have peeked at their highest level, and for selling when interest rates are at their lowest level and about to start climbing. So maybe you pulled out a bit too quick.

Bernard, here are some things to consider.
When the housing market is rising you try to buy houses with long posession dates so that on the posession date the house is worth more than you paid for it.
I am not into the sharemarket but i imagine that mining company shares could be a good buy seeing how things are sluggish in that area. These raw materials will be valuable when the market picks up so worth looking into.
You could consider lending some money on a first mortgage.
You could risk investing some money into a new venture in the hope that it becomes a sucess and re-pays big time.
As to LVR's.
Back in the seventies when people could not get a big enough mortgage from the banks then the buyers would leave some money in on second mortgage. My mother sold her house for $21,000. The buyer offered $18,000 as that was all they could raise so my mother left $3,000 in at 6% interest and got the $21,000. Then the house she bought for $24,000 the buyer left $6,000 in at 3% interest.
A person i met many years ago used to sell houses. They would buy a basic house in a low to middle area. Then they would fill the house up with all top of the range furniture, etc so the place looked fabulous and then they always got top dollar when they sold. Then they would take all their fabulous stuff to the next house.

Mining is going into recession, such shares may become worthless.  The cost or re-opening may neve make sense V what we can afford to pay for the output....

I notice that a lot of the people who were on here claiming property prices would plummet a few years ago are still here. How do you all feel about it now?

Being priced out of the market in your home town is awesome! lol

Nobody owes you a cheap or even affordable house, no matter where you come from.
I hope you're not referring to Auckland as a "town"?

Yeah a simple 2 bed unit would do me pretty well, but even then thats unaffordable. Quite ridiculous. Yes I just refered to Auckland as a town. Its certainly not a Super City

Note: 2 Bedroom unit in Double Bay Sydney $600K. Sydney has 5 million people.
2 Bedroom unit, Mission Bay, $450-500K. Auckland has 1 million people. Overpriced much?

Sydney is irrelevant to Auckland's prices. Hey if you think it's over-priced. Just wait a few more years like Bernard said in 2008(?)... it might come down!

in 2008, like many of my ilk, I was at university. Grads have a great chance of buying a first home and have already saved a deposit because instead of taking the bus to uni, we walked 50 miles there and back, and didnt spend money on shoes, or food.

So you're a couple of years out at Uni and think you should be able to afford to buy in Mission Bay?

I would go as far as thinking that a modest 1 or 2 bedroom unit would not be outside of my price range

Buying a rental house in Wellington is probably not a bad idea - but buying a place to live in yourself is not a very good idea. Has it occured to you that you will now have to live in Wellington?

FWIW, I read a great quote out of China referring to bubbles. "When the hurricane comes, even pigs can fly in the air."
Good luck to you Bernard! You have always come across as an ethical person and that is the reason I am always interested in what you have to say.


FYI from an emailer:
Dear Bernard

As a 28 yo Y Gen I have some concern about the current world economy
and NZ housing market.

In my view smart house/property owners in NZ should seriously get out
why they can (the potential to save money is to now exit nz property
bubble) this will save their equity or get a good price why they can,
which will disappear when the bubble burst and there is nobody to buy
inflated houses. They can then wait for prices to fall rapidly and
repurchase the family home at true cost price.

The bubble is not far away I believe, as there will no little
potential for capital gains to keep rising in the future to be made
(they have already been made), housing will return to its true purpose
value of shelter as it rightly should.

Who are going to be the losers here? middle class NZ who are currently
slaving away to pay the mortgage on over-valued property, sad but true
they are going to lose their equity in the years to come.

I am quite content to take a slightly different approach, if you
follow the masses you will never see the early opportunities, I
half-way predicted a GFC back in 2004 while studying at university. My
agribusiness lecturers were teaching us that 2% ROC was ok because
overall capital gain on farms was 10% per year. So farmers were
encouraged to buy the neighbours farm than develop production on their
existing farm.......This made no sense to me at the time, because true
economics was about economic productive output. Agricultural students
were encouraged to take agribusiness and valuation courses over
animal/ pasture/ crop production papers, because a farms productive
output was just a by-product to fund the big opportunity for capital
How things have changed now......and funny enough the same lecturers
have changed their tune as well as they look for the remaining
opportunites involved with farming and encouraging cashflow more than
ever and the focus has changed to production. Sadly I will never own a
farm now as who would want to commit financial suicide?

I have accepted the fact that things are over-valued in NZ, what else
can I do. Now that I have I can be thankful that I don't hold any debt
and in the current times, which is fantastic! I have also re-evaluated
my goals in recent times and reduced my work week to 30 hour week,
giving me more time to live my life and be more content to smell the
flowers. I think a lot of people are so busy trying to pay their
mortgages that they dont even see the flowers, it sad

your thoughts?


I share many of your concerns and am doing something similar by repaying my mortgage.
We'll see whether the over-valuation actually causes a price implosion.
So far, the authorities have effectively pumped money into the global system to stop it collapsing, hoping they can keep it all together for long enough for growth to solve everyone's problems.
It might work. It might not.

The problem I have with getting out is where do you put your money so its really safe while these losses by owners are absorbed by the banks.  So I sell my house and put 1mill in the bank....sit and wait....We see 25% + drops and the money in the bank with the OBR etc gets a nasty cut while that happens.....
Debt though will always remain.

. . . which will disappear when the bubble burst and there is nobody to buy inflated houses. They can then wait for prices to fall rapidly and repurchase the family home at true cost price.
Are New Zealand houses are really over-priced?
If houses were over-priced, then surely there would be scope to speculate by building for the purpose of selling and making a profit. The level of resource consents issued suggests that this is certainly not the case. During the period 2004 to 2006 house prices may have been over-inflated which did lead to many spec houses being built.
I note that claims that New Zealand house prices areinflated is usually on the basis of either a straight comparison of house prices to those overseas, or a comparison of the ratio of house prices to income. Such claims assume that the housing stock in New Zealand is the similar to that in other countries; given our preference for stand-alone relatively large floor area homes related to our particular lifestyle values, such claims are questionable.
So, unless we see a rush of resource consent applications, “the true price of a family home” may be even higher price than those currently!

. . . which will disappear when the bubble burst and there is nobody to buy inflated houses. They can then wait for prices to fall rapidly and repurchase the family home at true cost price.
Are New Zealand houses are really over-priced?
If houses were over-priced, then surely there would be scope to speculate by building for the purpose of selling and making a profit. The level of resource consents issued suggests that this is certainly not the case. During the period 2004 to 2006 house prices may have been over-inflated which did lead to many spec houses being built.
I note that claims that New Zealand house prices areinflated is usually on the basis of either a straight comparison of house prices to those overseas, or a comparison of the ratio of house prices to income. Such claims assume that the housing stock in New Zealand is the similar to that in other countries; given our preference for stand-alone relatively large floor area homes related to our particular lifestyle values, such claims are questionable.
So, unless we see a rush of resource consent applications, “the true price of a family home” may be even higher price than those currently!

To Matt in Auck - that was an insightful comment - the frenzy will have reached it's peak when BH sells his mortgage free home in the South and comes North again to do just what he says here.

Bernard this is the problem in auckland where property speculation is running amuck , banks should be ashamed .
I would suggest that if you wait 2-3 years then you can swoop in and get the bargains at realistic prices . China is on the verge of shutting up shop with regards to spending and growth , australian banks and off balance sheets should make everyone nervous , it will all end badly for both the Australian property market and then Auckland. It should be made clear to the NZ investors the position of new zealand ( australian) banks and their head offices across the tasman.  2013 is going to be the start of massive deleveraging the signs are there now if you consider the European union and the relationship that is appearing with the ECB, this will surely then hit the USA when it does keep your gunpowder dry.

Bernard I havn't commented on this site for a while as I have just been watching with interest.
I predicted these price increases some 18 months ago while you were telling everyone to sell as the bottom was about to fall out of the maket.
Those that followed my advise and brought a good property will have done very well and will so for the next 2-3 years.
However I also don't agree with your investment advice, far to risky for the astute investor.
In your case you would have been better to keep your Auckland property and borrow to buy in Wellington as its unlikely now that you have sold in Auckland you will be able to afford to come back.
Enjoy Wellington.

BH, you should do what your heart tell you to do.  Invest in NZ owned business that generate both good income and jobs.  The Chow brothers is looking for investment partners...

Bernard, how do you think the tax system can stop this? A capital gains tax would quite rightly only tax your profit - so even if there was a 33% capital gains tax you would still make 90% or so return in one year (or lose the lot which is probably just as likely)