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Myth or Magic: Thoughts on New Zealand Property

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  • Myth or Magic: Thoughts on New Zealand Property

    Hi Guys

    Comment on the NZ market from Steve McKnight of Propertyinvesting.com:

    Here's what's on offer in this month's Insider:
    * Myth or Magic: Thoughts on New Zealand Property
    * Forum Post of the Month - Confused and need some help please
    * Property Master Class Update

    Myth or Magic: Thoughts on New Zealand Property

    In mid 2003 and after hearing rumours about investing in the land of make-believe where there was no stamp duty or capital gains tax, Dave and I decided to see this mythical place for ourselves by venturing across the Tasman to New Zealand.

    Our visit was to be a reconnaissance mission to gain 'on the ground' experience with the kiwi real estate market rather than relying on snippets of information or gossip filtering through places like the PropertyInvesting.com forum.

    We flew out on a Friday, attended an all-day seminar on Saturday and then spent the next three days driving around to various areas and inspecting properties.

    On the plane trip back we tallied up our efforts and, although we went there to look rather than buy, we couldn't help ourselves and acquired 35 houses - most on 15%+ yields.

    For example, one of the properties we bought was a house for the bargain price of just $23,500 (unbelievable, right?). Today that property is rented at $95 per week and delivers a gross 21% return.

    Now, to be fair I need to confess that the market has somewhat changed since then, and these types of deals are becoming harder and harder to find, but I can tell you on good authority that they still exist.

    It's no wonder that Australian investors are becoming increasingly aware of Kiwi opportunities, especially given the favourable foreign investment laws and seemingly impressive returns. Nevertheless, I wouldn't want to be unfairly accused of over-hyping an opportunity so I have taken the liberty of providing you with a quick overview of the pros and cons of investing in New Zealand real estate.

    The Pros:

    The New Zealand and Australian property markets are very similar, although sometimes the terminology is quite different. For example, houses in New Zealand are held up by 'piles' whereas houses here are supported by 'stumps' (I use that illustration as I was a little incredulous when the agent started talking about piles!)

    Despite an occasional hiccup, the differences in language aren't vast enough to be overly concerning and I found that more often than not the conditions in Australian are more onerous.

    Property across the Tasman is certainly cheap by Australian standards. For example, Auckland prices are amongst the highest in the country but they're still very favourable when compared to Sydney or Melbourne values.

    Lower prices make the rental returns more attractive too and it's reasonably easy (or perhaps I should say 'not altogether difficult') to source deals that meet The 11 Second Solution. Like Australia though, the majority of these locations are in traditionally poorly regarded regional areas that have a history of underperforming in terms of capital gains.

    In a nutshell the biggest benefit about New Zealand property is that there are plenty of deals that lend themselves to providing positive cashflow outcomes without needing vast amounts of investing skill.

    The Cons:

    While we share some flexible Visa arrangements, it shouldn't be forgotten that New Zealand is a separate developed country with its own currency, banking system and legal structure.

    Bearing this in mind I'm quite concerned by the casual approach some investors seem to have in respect to buying offshore property when in fact it's a strategy that comes with many additional risks.

    For example, on top of the normal issues of buying property and dealing with tenants (such as vacancies, structural stability, securing finance etc.), Aussie investors buying Kiwi real estate need to manage currency fluctuations together with the tyranny of distance (i.e. time zone differences, expense to get over there etc.)

    So, while houses may seem cheap and offer good returns, you may discover that beauty is only skin deep. When you scratch through the surface you'll find a plethora of issues, risks and problems that need solving before you make a dollar of profit.

    Yes - there is the opportunity to make money but if you have to risk your neck for the sake of $10 then it may be better to pass up the opportunity.

    One point that I would like to bring up is the perception that New Zealand property is capital gains tax free. This may be the case for residents of that country, but Aussie investors need to be very careful as Australian tax laws are carefully worded so that Australian residents need to include both foreign and domestic sourced income in their tax returns.

    That's to say that Australian investors may avoid paying tax in New Zealand on their New Zealand capital gains only to find that it must be declared and included in their Aussie income tax returns. It's a very complex area of law though, which if nothing else highlights the additional complexity of buying overseas.

    Additional information

    I accept that New Zealand property is a hot topic at the moment and I urge you to source more information prior to buying anything. If you've booked a seat at the upcoming Property Master Class then you'll gain a lot of benefit from hearing Dave Bradley outline the practicalities of buying and managing Kiwi property.

    In addition I'm pleased to announce a new resource that will shortly be available from Propertyinvesting.com It's a recording of an interview I recently did with Kiwi investor and legal expert Mike Ward. Over an hour or so we share our various insights and tips for investors seeking to make money via New Zealand real estate.

    Best of all it won't break the bank... but I'll save the exact details for an e-mail I'll send you once the product is ready for shipping (expected to be later next week).

    The final word about New Zealand for the time being is that there's much more to foreign investing than first meets the eye. You need to carefully weigh up the risk vs. the return and avoid blindly throwing money into a venture without a good knowledge of the area.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx