Evaluating your property holdings
By TONY BRAZIER - The Press Last updated 12:05 12/08/2009
OPINION: Evaluating your property holdings means keeping tabs on what is happening around the country, not just crunching numbers.
Analysing an investment property or portfolio is not always about just crunching numbers. Obviously this is part of it, and a part requiring the investor to either acquire the appropriate knowledge or pay someone else who has it.
Although delving into how a particular property in your portfolio is doing is where we start, whole-portfolio analysis requires a broader approach, including investigation into the economy, percentage rates, migration statistics and demographics.
Investors should ensure they are comparing apples with apples in their analysis (that is by suburb or property category).
Much reported data is of a general nature and can differ greatly for specific areas or property types. It is also often historical and, in some instances, has taken three months to filter through. Therefore, decisions and sometimes valuations can be made on statistics that could be stale, depending on how quickly the market is changing.
Let's start with the property.
You can project forward what you think will happen over a particular period, then analyse your investment as though that had happened (this is called discounted cashflow analysis).
To do this, an investor must take an educated guess at the likely consumer price index, capital growth, interest rates and expenditure needed during that time. In other words, you need to get educated before you can analyse anything.
Over-reliance on formulae you don't fully understand is treacherous. If you use a spreadsheet, keep in mind the term "rubbish in, rubbish out" - if you put in bad data, you won't get a good result.
To find out what's happening in the economy, join the weekly email list of your favourite bank's chief economist. Know what is happening in the interest rate market and general economy.
The bankers will make broad comment on last month's median house prices and interest rate changes and give up-to-date migration figures as well.
Keep an eye on the Government's website on demographics, population.govt.nz. This will help indicate whether a property type is likely to be full or empty in future, depending on which age group it suits and whether their numbers are fluctuating.
Keep abreast of legislation changes affecting migration and particular sectors of the population. For example, bad press in a foreign student group's home country can dry up the flow of tenants from that area.
Know the culture of the group you target and how that may influence their movements; for example, Chinese new year may delay the arrival of students.
Know your building consent figures. In the past year they have halved, causing a buildup of demand that will show itself later this year.
Watch for over-supply, such as when changes to housing-density rules in the mid-1990s encouraged developers to build while they could.
At the same time, the government told us to do something smartly about our own retirement plans, so many people bought new townhouses. What the buyers didn't research were the demographics of the likely tenants, and tenant demand dropped like a stone. Lack of research into all of these aspects resulted in a flat market in the late 1990s.
Plot your various properties on a risk versus profitability graph. Aim to have two properties earning cashflow for every one that is negatively geared.
If you are heavily weighted on the risk axis, buy older, higher- yielding properties or sell one or two that are not covering themselves.
Sometimes changing what you already have (for example, by renovating) is much more sensible than buying again to balance your portfolio.
It pays to know how much spending money on insulation, heating, painting and carpeting will improve your return. This can be the easiest way to rebalance your portfolio from negatively geared to positively, especially when we are in a market where vendors are hard- nosed and buyers overly expectant.
Finally, be careful of investing by a mantra.
"You make your money on the day you buy," can cause you to only seek out vendors who are in trouble or properties that return way above average. We have seen too many investors find out the hard way why they got a bargain when it came time for them to sell the property.
If no-one likes it but you, expect the same when you sell.
"Buy on the low, sell on the high." Most people get this wrong and it stops investors from buying what they like because the market is perceived to be at the wrong timing.
Analyse the market. Keep abreast of the economic, legislative, demographic, migration and housing supply information available. Decide on the type of property your portfolio needs to stay balanced and safe. When it comes up, buy it, regardless of the timing.
Although all residential property can be rented, it doesn't always mean it is an ideal investment, and remember: "Time in is usually much better than timing."
* Tony Brazier has worked in the property industry for 21 years and has two real-estate companies specialising in the sale and management of rental property. This column's information is of a general nature only, and readers should seek professional advice before acting on it.
http://www.stuff.co.nz/business/pers...perty-holdings
By TONY BRAZIER - The Press Last updated 12:05 12/08/2009
OPINION: Evaluating your property holdings means keeping tabs on what is happening around the country, not just crunching numbers.
Analysing an investment property or portfolio is not always about just crunching numbers. Obviously this is part of it, and a part requiring the investor to either acquire the appropriate knowledge or pay someone else who has it.
Although delving into how a particular property in your portfolio is doing is where we start, whole-portfolio analysis requires a broader approach, including investigation into the economy, percentage rates, migration statistics and demographics.
Investors should ensure they are comparing apples with apples in their analysis (that is by suburb or property category).
Much reported data is of a general nature and can differ greatly for specific areas or property types. It is also often historical and, in some instances, has taken three months to filter through. Therefore, decisions and sometimes valuations can be made on statistics that could be stale, depending on how quickly the market is changing.
Let's start with the property.
You can project forward what you think will happen over a particular period, then analyse your investment as though that had happened (this is called discounted cashflow analysis).
To do this, an investor must take an educated guess at the likely consumer price index, capital growth, interest rates and expenditure needed during that time. In other words, you need to get educated before you can analyse anything.
Over-reliance on formulae you don't fully understand is treacherous. If you use a spreadsheet, keep in mind the term "rubbish in, rubbish out" - if you put in bad data, you won't get a good result.
To find out what's happening in the economy, join the weekly email list of your favourite bank's chief economist. Know what is happening in the interest rate market and general economy.
The bankers will make broad comment on last month's median house prices and interest rate changes and give up-to-date migration figures as well.
Keep an eye on the Government's website on demographics, population.govt.nz. This will help indicate whether a property type is likely to be full or empty in future, depending on which age group it suits and whether their numbers are fluctuating.
Keep abreast of legislation changes affecting migration and particular sectors of the population. For example, bad press in a foreign student group's home country can dry up the flow of tenants from that area.
Know the culture of the group you target and how that may influence their movements; for example, Chinese new year may delay the arrival of students.
Know your building consent figures. In the past year they have halved, causing a buildup of demand that will show itself later this year.
Watch for over-supply, such as when changes to housing-density rules in the mid-1990s encouraged developers to build while they could.
At the same time, the government told us to do something smartly about our own retirement plans, so many people bought new townhouses. What the buyers didn't research were the demographics of the likely tenants, and tenant demand dropped like a stone. Lack of research into all of these aspects resulted in a flat market in the late 1990s.
Plot your various properties on a risk versus profitability graph. Aim to have two properties earning cashflow for every one that is negatively geared.
If you are heavily weighted on the risk axis, buy older, higher- yielding properties or sell one or two that are not covering themselves.
Sometimes changing what you already have (for example, by renovating) is much more sensible than buying again to balance your portfolio.
It pays to know how much spending money on insulation, heating, painting and carpeting will improve your return. This can be the easiest way to rebalance your portfolio from negatively geared to positively, especially when we are in a market where vendors are hard- nosed and buyers overly expectant.
Finally, be careful of investing by a mantra.
"You make your money on the day you buy," can cause you to only seek out vendors who are in trouble or properties that return way above average. We have seen too many investors find out the hard way why they got a bargain when it came time for them to sell the property.
If no-one likes it but you, expect the same when you sell.
"Buy on the low, sell on the high." Most people get this wrong and it stops investors from buying what they like because the market is perceived to be at the wrong timing.
Analyse the market. Keep abreast of the economic, legislative, demographic, migration and housing supply information available. Decide on the type of property your portfolio needs to stay balanced and safe. When it comes up, buy it, regardless of the timing.
Although all residential property can be rented, it doesn't always mean it is an ideal investment, and remember: "Time in is usually much better than timing."
* Tony Brazier has worked in the property industry for 21 years and has two real-estate companies specialising in the sale and management of rental property. This column's information is of a general nature only, and readers should seek professional advice before acting on it.
http://www.stuff.co.nz/business/pers...perty-holdings
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