Archive for the 'Investment' Category
“Is it a good time to buy property?”
A popular answer among investors is “It’s always a good time to buy property”… or how about another popular one: “the best time buy property was last year, the next best time is now”.
Well neither of those answers will be very useful for many!!
So let’s have a look at what has happened over the past few years in the property market:
- historically very low interest rates
- exceptionally low volumes of sales
- slightly falling nominal prices and significantly falling real prices (taking inflation into account)
- lowest levels of building consents in decades (indicating very little new supply of housing to accommodate increasing demand)
- increasing pressure on rents in many parts of the country
- Auckland showing strong signs of recovery
- yields in my experience at historically high levels (easy to get gross yields over 7%, even 8-9%)
We have also been in the trough for about 4 years in real estate. For 4 years, many people have deferred leaving home, moving into a nicer flat, buying their first home, upsizing, downsizing… the list goes on. Have these people stopped having major life events? NO!! They have put their decisions on hold though. Temporarily. And when they get the confidence that their future is again secure, they will stop putting up with living at home, living in a house that’s too small, living with their grungy mates etc… they will get out there and start moving to the next stage of life.
What does this mean? It means increased demand for all sorts of housing, for rent and for sale. Given the supply of housing is fairly static at any given point in time (economists call this “inelastic”), this will quickly translate into pressure on rents and prices, in the upwards direction.
So if you are thinking of buying your first home, investing, upsizing or whatever… do not wait for the buying to get any better. For my money, it is about as good as its going to get.
Might I be wrong? YES!! But if this is not as good as it gets, I reckon it is pretty damn close!!
So, when is RIGHT NOW a good time to invest or buy? RIGHT NOW, that’s when!!
Get out there are go for it kiwis!!
June 01 2011 | Investment and Uncategorized | No Comments »
Why do some property investors seem to be able to continually add to their property portfolio, whereas most buy a few properties and then can’t go any further? One of the main things that separates the really successful investors from the average investors is the properties they choose to buy.
Let’s have a look, then, at what makes a great residential investment property.
Firstly, what are the main objectives of property investors? The most common objective is something like this:
“To create a passive income stream to enable me to stop working if I wanted to… to enable me to retire comfortably so I can spend my time doing what I want.”
An ancillary to this primary objective would be to accomplish this without demanding massive risk or huge effort / stress in managing the properties.
Assuming that these are the objectives, then the following are qualities to look for in a superior investment property:
1. High income:
- If your property covers all costs of ownership (the main ones being mortgage interest, rates, insurance and maintenance), it is not going to place great financial strain on your existing cashflow.
- If you want to grow a substantial portfolio, you can not have properties that place a strain on your cashflow, because that limits how many you can own.
- Over time, when rents increase, a property that covers its costs today, will produce a positive cashflow in the future, hence helping to grow your passive income stream.
2. High Tenant Demand Location:
- If the rent looks high compared to the price of the property, but it is located in an area that is unappealing to tenants, you will have periods of vacancy, which equates to periods of sleepless nights, which equates to “I’ve had enough of this property investment game – I’m out!!”…
- These frustrations are not what you need if you want to be successful!! If the property is in an area that is always appealing to tenants, you will easily be able to replace tenants when they leave… this amounts to sleeping at night, which we like!!
3. Fee Simple Title:
- A fee simple title is the best legal tenure you can get. With this type of property, you are in control of your asset. For example, you can improve it, extend it or alter it, as you please, without consulting with neighbours, Body Corporates (as with apartments) or common leaseholders (as with cross-lease titles), subject to conforming with the local council rules, of course.
- This is important because people (including us Kiwis) LOVE control. The more control and flexibility you have, the more control you have over your future and your choices, the more appealing the property is to LOTS of people.
- Therefore it will be easier to sell, and more likely to sell at a premium price, when it comes time to sell (including if you need to sell in a hurry, heaven forbid!). And there almost ALWAYS comes a time when you will want to sell.
4. Traditional Construction:
- People do not like things they do not understand. Investors especially like the tried and tested… they don’t want to experiment.
- Therefore, to make sure your property will appeal to the broadest range of potential tenants and purchasers in the future, make sure it is built in the traditional way… weatherboards, iron or tiled rooves, bricks… this is what us kiwis feel confortable with.
- If it has a 1990s-style monolithic style cladding system, many people will simply not consider it… don’t give yourself this disadvantage when it comes time to sell!!
5. Difficult to Replace / In Short Supply:
- If you are going to own an asset for a long time, you might as well own one that is most likely to increase in value faster than most… and this comes down to good old supply and demand.
- In a decent sized city, with an increasing population, demand for housing is increasing over the medium to long term. But it is much easier to increase the supply of some kinds of housing, than others, in order to meet this increasing demand.
- For example, in central or city fringe locations, the supply of apartments and townhouses is likely to increase dramatically in order to satisfy the demand for additional housing in these locations. This eases pressure on price increases (supply increasing to meet demand).
- On the other hand, the supply of free-standing houses in these locations, is really not increasing by much – IF AT ALL!! When you have demand increasing, and supply largely static, this tends to produce strong increases in prices.
- Therefore I recommend buying free-standing houses, rather than apartments or townhouses.
If you can buy a free-standing property, with a fee simple title, in a high demand location, built using time-tested construction methods, with a strong cashflow (say 7.5-8.0% gross yield or even more if possible), then you are in PROPERTY INVESTMENT HEAVEN!!
Now don’t get me wrong – I never said it was EASY to find these types of properties… and you may have to compromise one or more of these criteria, but if it was easy, EVERYONE WOULD BE RICH!!! And last time I checked, not everyone is rich…
So now for my shameless plug for a GREAT investment property that I happen to be selling!!!
This one here is a beauty – check it out against the criteria discussed above – I’d be very surprised if you can find a better investment property in Wellington than this one right now:
This Property Ticks Lots of Investors' Boxes!!
Click here to find out more:
Adam Cockburn, Licensed Salesperson REAA (2008)
+64 21 409 637 I firstname.lastname@example.org
twitter: @wgtonproperty I facebook.com/WellingtonPropertyAdamCockburn
February 15 2011 | Investment and Uncategorized | No Comments »
TIP #2: SELL WITH RENTS AT FULL MARKET RATES, WITH NEW 12 MONTH TENANCIES IN PLACE, DURING THE PEAK RENTAL SEASON
Welcome to the second article on “Selling Investment Property For Top Dollar”.
With an investment property, one of the main questions that a prospective purchaser asks is “how much rent am I going to enjoy from this property?”
GROSS RENT = Weekly Rent x 52.
Then, to a large degree, an investor will determine the value of a property from this annual rent. They essentially ask themselves “what rate of return am I happy to earn on this property?” This rate of return they are seeking is often called the YIELD. They therefore determine the value of the property as follows:
VALUE = GROSS RENT / YIELD.
For example, if a property is rented for $500pw = $26,000pa, and an investor will accept a 7.0% yield on the asset, they would be willing to offer a price of approximately:
VALUE = $26,000 / 0.07 = $371,428.
(Note1: the yield is generally a reflection of the quality of the asset – the higher the quality, the lower the yield – that is, an investor is generally willing to accept a lower yield on an asset that is of superior quality. “Quality” comes in many guises and I’m not going to go into this in this article… but let me know if it would be useful to blog about quality in a separate article)
Now let’s consider the effect of ensuring your rents are at full markets rates, with new 12 month tenancies in place…
Often I hear property owners explaining that they don’t mind renting their property cheaply, because “the tenants are really good, they are nice people and they look after our place well”. That is up to you as the owner, but there is real potential for under-selling your property if it under-rented like this at the time of sale.
For example, if the full market rent on the above example was actually $550pw (only $50 more than current, which is pretty common out there), then the value to that same investor could potentially increase to:
VALUE = $28,600 / 0.07 = $408,571 (an increase of over $37,000).
The next thing to do, is sell when you have got new 12 month tenancies in place. Investors love this, because it ensures:
- no vacancy for 12 months; and
- they do not have to do any maintenance prior to finding new tenants.
For this extra bonus, they may decide that they would accept a yield of 6.75% on the asset, instead of 7.0% (maintenance and vacancy can really eat up your rental returns, so there is true value in alleviate these concerns). In this case, the same investor may value your property as follows:
VALUE = $28,600 / 0.0675 = $423,704 (an increase of over $52,000).
These figures are clearly just examples, for illustrative purposes, but hopefully they make clear the potential impact on sale price, of this simple strategy.
(Note2: you are far more likely to achieve higher rents during peak renting season. So my favourite strategy is to secure new leases at full market rates, during the peak rental season. This also has the additional benefit to the purchasers that, when the existing tenancies expire, they do so during the peak rental season next year, meaning it is easier to rent fast and at full market rents again next year! Low vacancy and high rent = high value!)
Now although this is all pretty simple, it still takes time and effort and planning. Many of us do not have the luxury of time, nor the skill or expertise to know what full market rents are etc. So I always use a good property manager to handle these issues for me, and I recommend you do the same unless you are VERY knowledgeable about the current rental market, market rents and are very able to handle these negotiations yourself. If your sales agent is any good at all, they will be able to recommend good managers who specialise in the target tenant market in question. Yes it will cost a small amouint of money, but the potential increase in sale price makes this cost a total no brainer. If the purchaser does not want the incumbant managers to stay on, then just pay the managers a few thousand for their troubles, and you are still WAY on top.
I have used this technique many times when selling my own properties, but also when selling for my clients. It works a real treat!
Thanks for reading this article – and if you would like advice on achieving the best price for your investment property in Wellington, I would love to talk with you!
Adam Cockburn, Licensed Salesperson REAA (2008)
+64 21 409 637 I email@example.com
twitter: @wgtonproperty I facebook: “Wellington Property with Adam Cockburn”
January 24 2011 | Investment and Uncategorized | No Comments »
Hi there and welcome to my first blog!
I plan to post several blogs over the next couple of months about selling investment property. I am an avid investor myself since 1998, and am passionate about the ability of property to create income and wealth for average kiwis in their retirement. However, changing circumstances mean we all need to sell at some point (heaven forbid!), and when you do, there are lots of things you can do to maximise the appeal of the property to potential buyers.
Hopefully these tips will be of use, or at least of interest, to those of you considering selling investment property.
TIP #1: IDENTIFY UNTAPPED POTENTIAL
Obviously, the more income an investment property is earning, the more you are likely to sell it for. In some cases, however, you do not have the time to maximize the income fully.
In these instances, you or your agent must be an expert at recognising untapped potential in an investment property. Now “potential” in an investment property is very different from “potential” in a home. An investor is only really interested in two types of potential: income and equity. If your agent is able to identify untapped potential to increase the income and value of your property, and point out the value of realising this potential to buyers in the market, it just stands to reason that those buyers will pay more for the property than they otherwise would have paid, hence achieving a premium sale price.
One of my favourite ways of adding value to investment properties is adding bedrooms and bathrooms. You would be surprised where the potential for these can be found… laundries, hallways, lounges, kitchens, basements, back yards… the list goes on.
If an extra bedroom can be created, this could increase income by up to $160pw, which is worth approximately $100,000 in value, possibly even more, depending on the location and general quality of the property in question.
You might think this sounds obvious – and it is really – but you would be surprised how often this type of potential goes unnoticed, even to experienced people.
For example, I sold this property earlier this year…
This property had been a rental for many years – a 3-bed plus 1-bed home and income, located in Newtown Wellington, a very high rental demand location, being close to the city, hospital and tons of other services. The 3-bed flat could easily be converted into a 4-bed whilst retaining sufficient living space. This would increase the rent by $120-160pw, for an investment of circa $5,000 in my opinion. This is a huge improvement for a small investment.
The property was returning $750pw and sold for $565,000 at auction. This represents a yield of 6.9% which is not high by the current market standards. The price achieved would have been – at least in part – due to the potential which I made sure I pointed out to all interested parties.
When you are selling your investment property, make sure your agent is an experienced investor and renovator, so they can identify such potential, and therefore maximise the appeal and value to your prospective buyers.
If you would like any advice on maximising the value of your Wellington investment property, feel free to give me a call, I’d be happy to visit the property and share my thoughts!
Adam Cockburn, Licensed REAA (2008)
021 409 637
December 14 2010 | Investment and Uncategorized | 4 Comments »