Residential property investment prospects look particularly poor, according to a new study released this week in the home loan centre of www.msn.co.nz
However, the same study found that one region, and four cities currently do provide superior returns, and that two further cities are about to move into this same ‘superior’ category.
The research, carried out by interest.co.nz and sponsored by BNZ, measures a standardised after-tax return on residential property investment, and benchmarks it against after-tax returns on bank term deposits.
It also assesses the potential capital gains from holding this class of investment.
Over the long run, the research shows that residential property investment relied on capital gains to supply good returns – and those returns were very good when that was happening. Nationally, they peaked at over 40% pa in 2006. However, the dramatic slowdown in the housing market has seen these tax-advantaged capital gains evaporate in 2008, and although they came back briefly in mid 2010, they have gone again recently.
Prospects for them returning any time soon don’t seem positive.
However for investors who are focused on operating returns, these lower house prices are opening up increasingly profitable opportunities. At first-quartile levels, Gisborne, Wanganui, Timaru and Invercargill all currently deliver returns much better than bank term deposits - and Rotorua and Dunedin look like they are about to move into the same category in the first half of 2011.
The Reports pull together all the primary influences on returns – including rents, rates, interest costs, maintenance, insurance, and depreciation – to come up with a single profit after-tax as a percentage return on the equity invested in a residential property investment. They track this monthly since January 2006. They also track annual capital gains.
The research is hosted on the www.msn.co.nz website, and can be found here.
29 Comments
The absolute returns may be okay in $ terms , but a lot will depend on
1) the structure of ownership and your after- tax position.
2) The vacancy factor
After April 2011 , the new rules for LAQC's come into play , and this will level the playing field in terms of returns and all the folk who put $5,000 into a rental and wrote off $30,000 a year in interest and other expenses .
The new rules don't allow this rort to continue .
The next important thing is there is no return when the property is vacant , ( zero zip zilch) and in my experience, the vacancy often arises from you having to evict a tenant for non-payment .
The expenses however , go on , Rates , regional council rates , Insurance, garden maintenance , building maintenance, accountants fees, its endless
The non- paying tenant eventually leaves , and you have to repaint and fix holes in walls and doors costing thousands .
Then the agent brings another tenant and you pay more commission .
You can end up having three sets of tenants in a year , pay three lots of commission , having legal costs chasing non-payers ( especially local students ) and have no rent because of vacancies for up to three months a year.
Anyone buying residential property for investment is a fool .... period
Boatman, stay clear of residential rentals, if you are not cut out for it.
Here's a tip- avoid cheap bargain properties as you will get low calibre tenants (been there done that, learnt the lesson). Well presented and well appointed properties are always in demand by people who have a bit of self respect and the tenancy is usually a good experience.
I am not cut out for dealing with residential tenants and all the expensive hassles that go with them. Residential estate agents are just incompetent when it comes to investment My experience is that commercial property is less messy ( more formal and businesslike ) , but one is enough for me
Agree, bit like Ollie N quoted the other day "a better class of enemy", or something like that. All the landlords quitely nodded their collective heads, while the others blogged and bleated their collective hearts out on that one. The one rental I have, which was by default really, as I never got around to selling the place when I bought another place to live, become vacant the other day. Had it rented to some family members. Still ripped me off 2 weeks rent and stuffed the oven. Bastards. Anywho, I jacked up the rent well above the going rate, got heaps of replys from what I would consider "prime A-class tennents", as they didn;t want to live in a cheap area. Then I wound the rent back to an acceptable level to secure them. Scumbags priced out of the market. New tennent working out great, everyone a winner.
I'd still do every check known to mankind, though. My last tenents got a 'suit and tie' couple with a kid to front the paperwork. The actual 'inhabitants' knackered the stove ( coooking something or other that needes lots of tinfoil); stuffed the carpets and walls, and filled the garage with 1.5tonnes of rubbish and left me with months of hassle in the Tenancy Tribunal. 20 grand of repairs and lost rent, and all the while 'passing' the regular agants inspections.
"Here's a tip- avoid cheap bargain properties as you will get low calibre tenants (been there done that, learnt the lesson). Well presented and well appointed properties are always in demand by people who have a bit of self respect and the tenancy is usually a good experience."
Yes, because people who are unable to pay high rents have no self respect.
Since you ask , I have a simple plan and it does involve property to some extent
I got out of two residential investments some time ago and over the years have invested as follows
1) Fonterra bonds 18 months ago.
2) Goodman Property Trust , yielding 8% about a year ago, a good quality well managed property owning Company
3) Kiwi property trust , ( owners of Sylvia Park) at a yield of 9% also about a year ago
4) Infratil for capital growth about 5 years ago
5) Port of Tauranga and Auckland Airport about 5 years ago
6) Paid off my original $400k mortgage on the family home two years ago
7) Geared up a small single tenant commercial property investment ( which we used to trade from) and put the money into the Fonterra Bonds (Above) because the fixed costs of borrowing on the property were much lower than the yield on the Fonterra bond issue . I collect the rent from this commercial property myself each month (I dont use a property manager to do something I can do myself ) and I visit the tenant every few months to see how they are doing
8) I have bought some shares in BHP , Rio Tinto and Anglo American Mining on the Australia stock exchange after the GFC crash
9) I keep $55,000 in fixed deposit in NZ and another $20 000 in fixed deposit with ANZ Sydney
My net investments ( excluding gearing on the commercial property ) are roughly 1/3 in New Zealand bonds and on NZX in solid asset based companies , 1/3direct property including the family home and Commercial property investment, less than 1/3 in good solid high cap mining shares on ASX and about 5% in cash .
I am over 50 years old and I want genuine passive hassle free investment income , residential property is too much gymnastics for me and I will never again invest in a residential rental.
And I sleep well at night
Well done Boatman, you certainly haven't missed the boat. I reckon you should have the nous to diversify into a few rentals. Seems like you had a bad experience but you should know how to minimise that. Having said that, sometimes it 's best to stick to one's knitting and concentrate on what you do best.
Rentals ? ...... C'mon muzza , move up the food chain to commercial property . That's where the real munny , and the quality tenants reside ............... Ever seen Bob Jones here at interest.co.nz ? ...... No ??? ........... 'Cos he's too busy ( and having too much fun ) to waste his time on clowns who seriously think that residential houses are an " investment " .
............ they're a tax dodge , nothing more or less . Unproductive , a waste of time and capital , a tax avoidance !!!
..... and Boatman , bless our little sculler , has a commercial property ........ ahhhhhhh , my hero ! ..... [ ...........second only to Sponge-Bob Square-Pants , of course...... ]
Well you will be very pleased with me then GBH as until recently I had 2 commercial properties but sold one last November. Property was on Dominion Road so had Asian bidders at auction, none it transpired were GST registered, so original sale fell through, had to subsequently accept sale at 815K, rather than 865K, thems the breaks..
Other one now has the City Council coming up with a 1 in 100 earthquake risk ( not in Auckland or Chch) and we're having to get engineers to look into things- the residential properties are being no problem in comparison
Hey muzza : I am surprised that you had fewer hassles with your residential investment properties , than you had with the commercial ones .
Were the commercial properties developed , or bare blocks ? Curious to know the income from them , as a % of cost , compared to that of your residential investment real estate .
I still see property investment as the best route to wealth in NZ.
Investing in NZX companies is crap. ASX is slightly better. And bonds at 8% interest? The rule of 72 means you would only double your money every 9 years. Not taking into account tax, etc.
Pretty rubbish.
Not many decent choices to make decent coin in NZ apart from taking huge risks to open and export business, etc.
Property investment is not dead.
You have the nerve to say that when the majority of PI's in NZ are currently seeing the values of their portfolio drop a little month by month and then you have to throw in inflation.If you are in a negative gearing situation it is red ink everywhere. Cash and good shares paying dividends are the current places to be in. Assets are just going backwards. Shares in health care companies that look after the growing aging BB generation are a very good defensive place to be in. Just look at Ebos on the NZX.
SK I just cannot just let a silly comment like that go by I am afraid. We are in for several years of property declines little by little each month. Only fools are buying rentals now especially those who are negatively gearing them. No wonder we are such a poor country.
Andrewj provided an excellent link this morning ( 28 pages ) , arguing that we are in for years of a slow deleveraging of debt and losses . That implies a gradual deflation , not inflation .
Stocks in good healthcare companies ( EBOS / Abano / Ryman ) may well outperform the NZX as a whole . As Bill Gates ( Microsoft ) said , look ahead to where the market is going , or to where societal demands are heading , and position yourself infront of that . Healthcare seems to be a " no-brainer ."
............. In a way , so is rental housing investments .............. ha ha de ha , a no-brainer !
Yup ! ....... an excellent read , if you're patient :
GBH - Usually better cash flow from commercial at 8% net (before tax), however one-off costs for this and that have ben bit of a disaster over past years. Have a bank as tenant and they are tough to get rent increases with, they have required over $100K maintenance last year and then they turned around and spent $800 K on the branch refurbishment! Get 5% net of costs for residential at present. Glad to have sold shop in Auckland 2 months ago as proceeds has given me an overall LVR of 9%, and plan in 18 mths time to be zero.
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