Auckland's shoebox apartments continue to provide some of the best rental returns available in the residential property market.
With a floor area of just 18 square metres, they don't get much more shoeboxy than one that was auctioned by City Sales last week.
But never mind the size, look at the rent.
Located in the City Zone apartment complex just off the top of Queen St in Auckland's CBD, it was rented at $310 a week or $16,120 a year.
That would provide a gross rental yield of 8.2%, compared to yields of 3.6% to 5% for the Auckland suburbs monitored by the REINZ/interest.co.nz Rental Yield Indicator.
Those low returns on Auckland suburban properties have seen many investors head to the provinces in search of higher yields, but even then an Auckland shoebox is likely to provide a better return.
Of the 56 locations around the country monitored by the Indicator, only five, Holdens Bay/Owhata in Rotorua, Flaxmere in Hastings, Waitara/Inglewood in Taranaki, Whanganui and Invercargill had gross yields above 8.2% in the December quarter of last year.
But how do shoeboxes stack up from a cash flow perspective?
Pretty well actually.
After allowing for two weeks vacancy a year and the payment of rates, the body corporate levy and setting aside $1000 a year to cover maintenance and sundry expenses, net rental income would be $11,985* a year, giving a net rental yield of 6.1% (pre-tax).
That compares well with the gross dividend yields on listed property entities like Argosy (6.3%) and Goodman Property Trust (6.2%) and is better than than the gross dividend yields provided by Kiwi Property (5.4%) and Precinct Properties (5.3%) as at March 14.
However the 6.1% yield provided by the shoebox makes no allowance for the modern miracle of leverage at historically low interest rates.
If it was purchased with a 50% deposit and a $98,750 interest-only mortgage at 4.89% (investors may need to provide additional security to obtain a bank mortgage on this type of property), the annual interest payments would be $4836, reducing pre-tax income to $7149 a year.
Although that's only 3.6% of the purchase price, the investors would have earned 7.2% of the cash they put into the property.
And if they paid a deposit of just 30% and borrowed $138,250, the annual interest payments would be $6786, reducing net taxable income to $5199, which would mean the cash deposit of $59,250 would be earning 8.8% a year.
So not only does the rent cover the mortgage and other outgoings, once they've paid tax there's still cash left over for the investors to do what they like with.
They could spend it or let it accumulate to pay down debt or reinvest.
With banks offering less than 4% on term deposits, earning 8.8% on your money is not to be sniffed out.
The downside to shoebox apartments is that they occupy a small, specialist niche in the market and their prices can be more volatile in a downturn.
After the Global Financial Crisis prices of Auckland shoxboxes plummeted far more severely than mainstream Auckland residential properties.
But their subsequent recovery was also spectacular.
Investors who had the cash and courage to buy them at the bottom of the cycle around 2009 would have subsequently made spectacular returns.
*Some investors may allow more or less money to cover vacancy and maintenance. No allowance has been made for a property management fee because many investors self manage their properties. Property management fees are typically about 8% of rent.
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42 Comments
NO NO, NO, Absolutely not ! A better investment would be a negative -yield bank account , because you will lose less money that way than in an apartment.
Its an expensive rollercoaster that you cannot get off easily
Auckland apartments are one investment best left well alone , they are hopelessly overpriced on a rate per m2 basis , and the Levies and Body Corporate fees are a killer .
You have little or no control over exorbitant management fees , and the maintenance bills for things like lifts and the costs of exterior repainting will destroy you financially .
The yield is so far into negative territory it would be better to invest it in a negative interest rate bank account.
I wonder why you say they are an investment that you cannot get out of easily when in fact they are selling well and achieving good prices. Payment of the actual BC fees (which cover building maintenance and the maintenance of things like lifts and repainting) on the example in the story have been allowed for and yet it would still provide a reasonable cash return. It's possible that a major unexpected, maintenance issue could occur and the owners would be asked for additional money to pay for this - but that could happen to any property. And it's probably more likely to happen in a freestanding house, where the owner would then have to pay the entire cost of the repairs themselves.
And the sales agents fee for extracting yourself is?
At least with Goodman I can get out within hours and the cost is about 0.3% of the capital.
What about PIE benefits of quoted trusts?
What about the inconvenience of tenants calls for service or are we going to let a property agent cream off the top 10%?
Hotbedding in Auckland
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=115…
The TV show 'Renters' featured a few episodes in which Auckland property managers discovered properties which had been sublet by the tenants without the property owners permission. One group was of foreign origin from a large continent to our north which I shall not name.
"Of the 56 locations around the country monitored by the Indicator, only five, Holdens Bay/Owhata in Rotorua, Flaxmere in Hastings, Waitara/Inglewood in Taranaki, Whanganui and Invercargill had gross yields above 8.2% in the December quarter of last year."
So you're comparing a single, one off example of a 'shoe box, 18 sqm apartment' with general averages in the provinces?
I get net 6% return on 1960s houses on 600-odd full size section in P.N. Not only does the rent cover everything (on 4.39% mortgage) but you'll see historically across all areas of NZ its the LAND VALUE that increases during up turns.
I'd take 6% net (even 5% net of rates, insurance) if it comes with a full size section in a decent size growing city like PN (85k, bigger than napier, hastings, rotorua, and gaining approx 2k people a year at present).
If I was buying apartments, I'd be looking for closer to 10% gross yields, which are easily possible in Wellington, and thats on 40sqm jobs, 20 sqm 10% plus easy. But the benefits of leverage only seen at 40 sqm plus where 20% dep is required (none of this rubbish 30% carry on in auckland!)
20% deposit plus net 6% doesn't sound great but when money is so cheap (4%) an average deal is 5k cash flow positive p.a. 20% in on a 250k house is 50k so that a 10% return on equity.
These are balanced growth/cash flow, having full section so run inflation over the land value say 2% (even though history shows 7% to be more accurate) and it's a nice was to get safe exposure to nz property.
Yes it was PN we were thinking of.
So the 5k is pre tax, do you pay tax as you go throught the year (to see the cash flow effect).
With the capital gain, does that get netted against interest deductions? So is that tax 2% rising against 4% of 200k. (Assuming interest only).
Re safe. We are not sure we would agree.
Its like have you borrowed too much, or not enough.
If the deposit came from revaluation reserve of the property before you are on no cash in. And thats how the spectulators tell us they do it.
If its by itself more equity in may be best (redrawing to cover any unexpected item). Otherwise being that geared shouldn't the equity earn more like 1.5% to 2.0% a month (risk adjusted return)?
Does the bank have it down as a homeloan, or note you as an investor/ multiple landlord.
We are not against property and have similar.
Generally 4-5 properties and bank considers them all home loans and you only need 20%. After that they tend to want 30% and with more properties you'd wand to run lvr around 70% or less anyway.
Generally in n.z you would want to get 4 properties to your name asap after starting work. It's easy with Bank lending up till 4 and you can even manage 4 yourself without drama. Owning no property in a young growing country like n.z is extremely risky, you'll find the opportunity costs of not owning property to be extreme, it's ironic that the most conservative of people however never fear massive losses through opportunity cost (human nature thing).
Capital gain at say 2% (overly conservative, currently running at 5% in p.n and accelerating) is bonus and tax free, you don't net it against interest you would only do that if the property didn't produce an income. I've net the cash flow against the interest to arrive at the 5k positive cash return.
Tax is always done year end with a good accountant who includes non-cash expenses such as chattle depreciation travel costs so you may find very little tax is paid on a 5k cash flow property.
A 270k 4 bed (or 3 bed + sleepout ) returning 380 a week would do this for you in p.n and is still easily achievable although buyers are now making multi offers so like Hamilton and tauranga the buying window may not be around for long
The cash flow situation is set out in the story, If you purchased it on a 30% deposit there would be a net pre-tax cash return of $7149 a year, which would be 7.2% on the cash that was put into it. If you paid cash for the whole thing, you'd be getting a pre-tax cash return of 6.1%.
2 weeks vacancy per year is very optimistic on an apartment like this. Longer vacancy terms would quickly eat into that annual profit. These apartments typically crash in value in downturns. We all know a downturn is coming (oneday) so that annual return could quickly become an overall loss taking into account a decline in value. I think if you talk to people who bought these apartments in the mid 2000's they will not be very positive about the overall returns (losses) they achieved.
The future focus for new apartments is on better quality and larger size. The commercial office conversions to apartments will also add to stock. It won't take that many new apartments to be built for these shoeboxes to quickly become the option of last resort.
I think these properties have risk written all over them at this point in the property cycle. Anyone considering buying one should be fully informed of all the risks, not just the potential positive return if everything goes 100% according to plan (and property prices do not decline).
Refer to my reply to Ranndoman re vacancy... "The unit was rented to an individual on a long term basis and the tenancy agreement had recently been renewed. That and the fact that the rental market is tight, is why I only allowed two weeks vacancy in the calculations." Plus I also included the following statement in the story: "The downside to shoebox apartments is that they occupy a small, specialist niche in the market and their prices can be more volatile in a downturn.After the Global Financial Crisis prices of Auckland shoxboxes plummeted far more severely than mainstream Auckland residential properties."
Several reasons. Banks were very wary to lend on small apartments after the Blue Chip scandal, although it was usually second tier lenders such as finance companies (and their mum and dad investors) rather than the banks themselves that got burned when the market plummeted after the GFC. Although banks have loosened those retrictions as the market recovered, as a general rule they are generally still cautious about lending on anything that's not mainstream. Note my comment in the article .."The downside to shoebox apartments is that they occupy a small, specialist niche in the market and their prices can be more volatile in a downturn. After the Global Financial Crisis prices of Auckland shoxboxes plummeted far more severely than mainstream Auckland residential properties..."
There are too many issues with the Unit Titles Act
- disputes process, long-term maintenance plans' funding requirement, supermajority rules, other voting rules, disputes fees - $850 or $3,300 whacks people who are behind in bills and slows BC taking case, and some decent case law. Tenants vs owners, who have different perceptions and expectations.
Similar sized apartment in the middle of a park in downtown Osaka Japan for half the rent. Close to the subway and practically as central as you can get.
http://www.bestestate.co.jp/english/0a/material/s6_photo01.jpg
Another Osaka apartment that is also downtown, 15% cheaper than the shoebox, more than twice as big, and actually livable.
http://livinginkansai.com/osaka/osaka_city/kita/sazanami_plaza_daihachi…
http://www.mansionglobal.com/developments
Youse investors lost out...cheapskates??.
Think big, think ...just where did they get the loot from...??. Legally..with gold, shares....or...."just homes for the Criminally Insane"
Or was it all just.."Borrowed into production from QE, etc".
Can someone explain to me why Kiwis have this(to me),absurd passion for rental property over the stockmarket? I was more than a little surprised when I retired here in 2003, to find that the market crash of '87, was still fresh in people's minds, when in the UK, it had been forgotten within a year or two. I do have a rental property,but by far the greater part of my capital is in the stockmarket and NZ offers higher dividend yields than any other developed economy.
My bafflement is compounded when I see what Kiwis are prepared to pay the(mostly useless) Real Estate agents in selling commissions.When I sold property in Scotland in 2003 and 2010, I paid the standard commission of 1%. I thought Kiwis were supposed to be smart. As far as property is concerned, I can only conclude that the answer is-Yea Right.
It's because we haven't had our '87 stock market type event in our real-estate market (yet). A number of other countries have of course and they're as a result, excuse the pun, a bit more street smart. They realise you do actually have to diversify. But no need for fear in the housing market in NZ. It's never let us down before, so by logic, it never will in the future. Here they seem oblivious to the fact that it is possible that Auckland property prices could drop significantly over the next 3-5 years. And if you look at housing markets globally and historically, it would appear to me to be more likely than unlikely. But yeah nah, that won't happen. The black swan event that tips the scales could well be dairy.
Linklater01 -The 1987 sharemarket crash had enormous ramifications for NZ'ers.....our economy sank into a hole.......interest rates were at around 21% and only came down slowly.......in 1997 a decade later depositors were still getting around 9%, farmers were still paying between double digit interest rates I think OD facilities were around the 15% mark............NZ took a long time to recover from what our Politicians embarked upon......it most certainly wasn't a quick 12 to 24 months slow down. I think the period should have been called a depression not a recession.......NZ's issues actually started well before the 1987 sharemarket crash.......1984 saw NZ remove all farmer subsidies all our exporters have done it very hard and we lost many industries.
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