First Timers, What have we done???

[flyernzl]

I noted it, but we have logged so many warnings against this type of tenancy that he should be aware of the potential for problems.

[GeePee]

So many missed this risk factor.

Yes I agree. People in general are a risk factor.

[Leftette]

Agree. Give me inanimate objects any day of the week.

[JABlog]

Make no mistake. IRD has a special budget now to tackle this sort of trading setup unless you have clear documented evidence.


Minus a potential capital gain ( think GFC ) it's a pure loss. Why pay $1 just to get 30c back?

[flyernzl]

Ah yes, but you also get 20c tax refund.

Whoo-Hoo

[JABlog]

Or even worse 20c. So it should be purely based on net yields not just on capital gains.

[NomoneyNotalk]

Hi GeePee,

I also have a similar investment property in West Auckland, a 3 bedroom with similar rent as yours and a subdividable backyard. It should be a good investment if you can manage especially in the first year. As you get no income from the backyard land while you are subdividing it. So you get low yield while subdividing as you pay higher price for subdividable property.

But when your subdivision is done, you can build a second dwelling making it a very good investment.

So make sure you get through the first stage, and you can also learn a lot from your first rental. I think it's good investment.

Good luck !

[Meehole]

I have a property in Whangarei rents for $340 week, purchase price $250,000. Fixed term tenants for 12 months and these are the best so far. My scenario is way better Aucklands prices are too high for investment, thats my opinion.

[Rosco]

Hi Meehole, At around 7% gross yield, if you had a full mortgage, then long term this Whangarei rental would also be losing money! At 6% interest rate, my quick figures on 100% mortgage are loss of $5,000. But at 7.5% interest, loss of $8,750 per year!

There is no perfect solution or perfect answer, but with Whangarei what has happened with prices in the last 5 years?

Vs Auckland?

In most of the smaller areas, the property prices have not gone up (some have gone down), so why would you have a negative cashflow property in these areas? Over the last 5 years with 100% mortgage and 6% interest rates, a Whangarei property like you mentioned would have cost you $25,000. Yes you might have got back $8,000 in tax refund, but still out of pocket $17,000. My guess on capital gain would be $0, so overall still down $17,000.
Vs Auckland might cost $50,000 over 5 years, but could have gone up over $100,000 easily. So might be $50,000 up overall.

This is obviously the past, and it is more difficult to predict the future. But it does highlight that you have to be very careful in the smaller areas, as with any property investment you still need some capital gain to really make it work.

Ross

[Bluekiwi]

Backing up what Ross has said, property is a wonderful vehicle that can achieve many things.

But first you have to have a goal or objective that you want property to achieve for you.

Then you have to work out a plan and strategy to achieve the end goal.

Each property you purchase, or each property deal you do, must move you towards that goal, otherwise your going backwards.

Think long and hard what that goal is, otherwise you may travel a long road to be somewhere you dont want to be.

[Meehole]

Rossco there is no doubt that the prices in Whangarei have stagnated for the past 7 years as has the rest of NZ apart from Auckland and post earthquake Christchurch.
The rent for the Whangarei property has not gone below $340 week for the past 3 years and it was purchased with a 10% cash deposit so more than pays for itself. Hopefully if the market ever picks up there will be a capital gain, until then the tenants pay off the mortgage (interest and principal.
We became landlords by default, caught in the downturn in 2008 and working in the building sector have moved provinces and even countries to secure work.
What we have learned is not to over commit ones self financially as you never know what is around the corner, and because of that make sure that the appropriate structures and insurances are in place.
There is nothing worse than worrying if the rent is going to be paid on time only to find out that the hot water cylinder needs replacing or the tenant has done a bunk owing rent and a bond that doesn't cover this or the damage to the property.
I have encouraged my own children to look towards owning an investment property and when the time comes hope that they follow my advise and crunch the numbers so they are positively geared before committing themselves.

[Rosco]

Here are my guess of the figures before tax - looking at long term view and I have factored in your 10% deposit

Ross

House Value		$250,000
			$250,000
Less Deposit			$25,000
Total Borrowed			$225,000
Income:
Rent -	Weeks	50				17000
	Per week	340
		As a % of total house			6.80%
Less Expenses:
Accounting					1200
Bank fees					50
Body Corporate					0		If interest goes up
Insurance					900
Interest		Rate	6.00%		13,500		7.50%	$16,875.00
Property Management at 7.5% plus GST					1,466
Rates					2000
Repairs and Maintenance					1000
Seminars					100
Subscriptions					300
Travel					86
Total Expenses						20602.25		$23,977.25
NET CASH SURPLUS (DEFICIT)						-3602.25		-$6,977.25

[Meehole]

Rosco if my accountant charged $1200 for one property then I'd find another.
If the insurance was that much I'd get another company.
Interest rate fixed at 5.09% for 2 years
Managed the property myself until recently
Rates are just $1300 pa this is Whangarei
Have not spent $1000 pa on maintenance, that would be $6000 over 6 years. More like $1800 for materials as hubby is builder over 6 years.
No seminars and no subscriptions.
It was tight to begin with as the mortgage rate was 9% and we had to top it up but continued paying interest and principal until we could get it to a level whereby we didn't have to top it up and the rent covered the costs.
$150 fortnight is far more manageable than what was mentioned earlier whereby they were topping it up $1300 month.

[speights boy]

Managed the property myself until recently

Meehole

Yes we have had our place in Tiki for 6 years now and we have had the odd tenant that we have had to chase through the TT.
I have a great property manager up there now and I have to admit that the times we did our dough was when we managed it ourselves.
We have lived out of Whangarei since it got rented and you really have to be living there to keep an eye on it.

...........

[Rosco]

Hi Meehole,

- interest rates average 7.5% to 8%. You might have 5% now, but is this going to continue into the future?
- Insurance is jumping up all the time, and a lot of investors are paying over $1,000 per year, for $250k properties.
- Repairs - Most properties spend over $1,000 per year in repairs in the long run. What about paint?

When comparing to the Auckland person, I'm trying to compare apples with apples. They probably have only 1 property so will be paying a higher accounting fee as it is for the entity too [ as you get more properties, the cost per property does go down]. They will most likely have a property manager and be paying 6% or more as they recently purchased, and have no deposit on the property.

If you use the same kind of criteria on your Whangarei property[so that we can compare], then it would be $5,000 negative, vs the Auckland $15,000. Over the last 5 years, its obvious that it would have been better to have the Auckland property as it would have jumped a lot more in value than the cost. Going forward it's still a hard decision which is better, as both are still losing money.

On your figures, $300 loss per month for Whangarei vs $1300 for Auckland - I would guess that the majority of property investors would still take Auckland.

Ross