To buy a 2nd rental property or not?

[jc_sbc_12]

We used our Auckland property equity to invest in Hamilton East last April 2015.
The Hamilton property is managed and rented 350pw.

Our strategy is to buy and hold it for as long as we can for retirement. My wife and I are both 28y/o.

The bank then pre-approved us for another $150k property. Just needing advise as to what best action plan.

1. We are thinking of investing in Kawerau as prices are cheap and it gives us good rental yield. However, I read an article about the ageing population getting more and more as the young ones tend to leave small towns to live in bigger cities.

2. Another option is Rotorua where we can still buy a 3 bedroom, stand alone with section.

Cash flow wise is fine, we have a little bit saved, and both of us works full time.
Auckland property - family home still mortgaged.
Hamilton property - investment rental property mortgaged
Rotorua/Kawerau - To go ahead or not? 150k worth of property.

[ScottSI]

Has just been a discussion on Kawerau a couple of weeks ago on here - do a search.

With 150K you could buy 2 places at 13% gross + yield which looks good on a calculator. In reality it is very different.

1 - Tenant pool is very small as town is very small and houses can fill straight away or sit empty for 6 months (most insurance policies will not cover more than 60 days of vacancy as well). Tenanted you make money - empty you are covering all costs so can you do this for 2 months or would you be under financial stress.

2 - What is the industry of Kawerau? How stable is it? when was the last time they laid off staff? all research you need to do in to any small town.

3 - What are rates, management fees, maintenance costs? usually always higher in small towns.

4 - Have you ever been there? If not go visit.

Recommend you go for a weekend away and look at these areas, visit houses, talk to management companies, etc. It might cost you $ 400 for the road trip but better than losing thousands due to a poorly informed decision.

Also a note that many people selling in Kawerau / Tokoroa etc are taking 20 to 60K hits on their sales from what they bought them at in the peak in 05 to 07.

Rotorua

Similar answers but bigger town. Again why you can buy a 3br house for 100k up (the cheaper ones (less than 100k) tend to be just out of town and tenant pool the issue again) you are buying at the bottom of the tenant market so increased maintenance, rent arrears, etc.

You also see lower growth so unless you are really seeing 12% + gross and some actual cash-flow I would be very weary as the headaches at this end of the market can be enormous.

Again go on a road trip and get to know your town before you buy. Also if staying in a motel / campground then try to find one near the suburbs you are buying in as you will get a better feel for the place than staying in some flash place in a nice area. Get out and walk around at night, drive down the side roads etc.

If you are on a slow steady path of buy and hold then I would aim to stay in the middle of the rental market regarding tenants, areas and size of towns/cities.

If you are throwing everything into the game and aiming to build a portfolio fast and can handle the headaches, endless damages and long hours etc then go for the bottom.

[OneStepCloser]

Hi jc_sbc_12,

Why do you not continue to invest in Hamilton? Is it not working well for you? I understand it may be a bit outside your budget at the moment but if you are just starting out, it may be a good idea to focus on one area, especially that it is out of town. Even getting a good property manager is not easy if you are new. BTW, I am also just starting out, living in Auckland and bought a property in Hamilton last year. I am going to continue to focus in Hamilton next, even it means that I may not be able to buy another one for a year or two.

My 2 cents worth.

[jc_sbc_12]

Thanks for your reply. I think that sticking with middle market is a good idea.
Maybe we have to really think about it, see, and wait.

[PTILoveYou]

Dont buy in small towns, especially the ones that have negative population growth.

Capital gains make you wealthy, not cashflow.

The vacancy period in small no where towns can kill your cashflow pretty easily, and any bad tenant issues will make you quit the game.

[ScottSI]

Dont buy in small tincreases wns, especially the ones that have negative population growth.

Capital gains make you wealthy, not cashflow.

The vacancy period in small no where towns can kill your cashflow pretty easily, and any bad tenant issues will make you quit the game.

Gary sorry to disagree but while book value increases look good on paper they don't put food on the table and aren't real money unless you sell the asset and then what - put the money in the bank for interest only?

I still see capital growth but really enjoy the cashflow which allows us to be finanically free (no jobs) and still pay off principal at a rate of 1 house every 6 months and increasing as debt reduces.

Due to market cycle and good buying I even have a few properties that have gone up over 100% in market value in less than 3 years so you can still see great gains in the regions (though cycle has moved making it harder now).

High capital growth usually means low yield and so owners are topping up and serviceability becomes the real issue not equity especially when interest rates rise.

I do agree on small towns being riskier so do your research and staying away from negative population growth is a good idea.

[PTILoveYou]

Capital growth doesnt mean no cashflow.

You can have both with the right deals.

But most important is location, location, location.

[Meehole]

Read the business section in todays Herald about the provinces. Suspect the budget later on will have an incentive for growth in the regions. National will pooping bricks over loosing Northland and will want to sure up the provinces before the next General election.

[Wayne]

Somehow you need to move business that doesn't have to be in a certain place into an under utilised place (the provinces).
Obviously moving a super market doesn't work but a distribution centre may work.
How you do that I don't know.
In Hamilton the Tainui Inland Port project is one such example.
It requires leadership from the Govt rather than leave it to the market I think.

[smartone]

I have thought many times about purchasing in smaller towns but I am put off every time because of the higher risks involved with tenant pools etc. I agree with scottSI go and check it out and get a feel for the places you are looking to invest in. Neighbors in these smaller towns are great! The hubby and I went to look at a house just outside of Christchurch. The area attracted the over 50's due to the hospital being near by and the all the shops were local. When we went to look at the property the agent was useless, she had no idea what she was selling. We happened to be outside when the neighbor poked her head out the window to chat to us. (thank fully the agent was still inside) She told me that the hospital was going to be torn down, and that she is moving closer to the city. She wanted to know whether we wanted her property also. She was a lovely lady but shortly after we decided to not pursue that property the prices dropped. All thanks to the little old lady next door. Now as a habit we do chat to the neighbors if possible.

[Frezzinghot]

I find the more observant you are when visiting a neigbourhood you don't know the better you get a feel for the people who live there. Ask neighbours if they like living there, you can uncover many issues just by asking.

FH

[Puff]

Just be wary thinking a 12% yield is the same on a $100k property than a $500k property.
It is substantially different.
Reason, expenses are pretty well the same but income is different i.e. Rates, Insurance etc are the same no matter how high the value of the property within reason.
Example:
Purchase Price of $100k
Income $12,000 a year
Expenses
Rates $2,000
Ins $1,000
R&M $1,500
P Man $1,104 8% + GST
Mort $6,000 at 6% interest rate
Total $11,604
Pre Tax Cashflow of $396 a year if 100% occupied.

Purchase Price of $500k
Income $60,000 a year
Expenses
Rates $2,000
Ins $1,000
R&M $1,500
P Man $5,520 8% + GST
Mort $30,000 at 6% interest rate
Total $40,020
Pre Tax Cashflow of almost $20,000 if 100% occupied.

Yes you do have to start somewhere so Im not saying don't buy cheap, but make sure you can get some gains/add value/add rent on the property when buying cheap or why would you.

[ScottSI]

Just be wary thinking a 12% yield is the same on a $100k property than a $500k property.
It is substantially different.
Reason, expenses are pretty well the same but income is different i.e. Rates, Insurance etc are the same no matter how high the value of the property within reason.
Example:
Purchase Price of $100k
Income $12,000 a year
Expenses
Rates $2,000
Ins $1,000
R&M $1,500
P Man $1,104 8% + GST
Mort $6,000 at 6% interest rate
Total $11,604
Pre Tax Cashflow of $396 a year if 100% occupied.

Purchase Price of $500k
Income $60,000 a year
Expenses
Rates $2,000
Ins $1,000
R&M $1,500
P Man $5,520 8% + GST
Mort $30,000 at 6% interest rate
Total $40,020
Pre Tax Cashflow of almost $20,000 if 100% occupied.

Yes you do have to start somewhere so Im not saying don't buy cheap, but make sure you can get some gains/add value/add rent on the property when buying cheap or why would you.

What you have shown is correct as fixed costs don't really change but it is far more likely to find 12 + % properties under 200K than above due the rental required.

The issue is finding a 500k property where you can get $ 1150 per week rent is the tricky part, not saying it can't be done, multi dwelling, room by room rental etc.

[Orkibi]

The issue is finding a 500k property where you can get $ 1150 per week rent is the tricky part, not saying it can't be done, multi dwelling, room by room rental etc.

I would buy the 500k property all day long if it is in Auckland, Tauranga, Hamilton or good part of Chch. and legal.
i think the rates and insurance would be higher, and possibly maintenance so you can probably add 5k to the outgoings to be safe.

[flyernzl]

Example:
Purchase Price of $100kRates $2,000
Ins $1,000

Purchase Price of $500kRates $2,000
Ins $1,000

Since both rates and insurance are directly related to the value of the property, I would expect these costs to be very much higher for a 500K property than a 100K one.