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  1. #1
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,307

    Default Iím NervousÖ. No Iím Scared

    The property market has already turned, or is showing signs of turning. LVR rules have had a huge impact, and I was getting set for a consolidation phase. My prediction was that the market would go flat, and that in 2-3 years there would be some desperate vendors, therefore some opportunities to pick up some bargains.

    Now the game has changed a little bit more;
    • 5 year brightline test. This personally doesn’t worry me, but the majority of property investors are after a quick buck. They want to buy a property now, it to jump up in value $100,000, and then to sell so that they can reduce their personal house loan, or buy a fancy car, boat , holiday etc. Paying tax on a property gain scares these investors.


    • Tenant friendly. Everything seems to be going the tenants way at the moment, no letting fee, only annual rent rises, 42 day notice becomes 90 day. There is also a lot of tenancy tribunal cases going against landlord, and some landlords are having to pay some serious money back to tenants.


    • Extra costs and compliance – insulation, smoke alarms and especially Health and Safety. Health and Safety is frustrating some landlords and also pushing up ‘Tradie’ costs.

    I would guess that 65% of property investors have negative cashflow, that means the rent doesn’t cover all the costs. These investors then love and rely on their tax refund. I just did a quick cashflow of a standard rental that an average/normal investor would buy now. $550,000 and getting maybe $475 per week in rent, so just over a 4% gross yield. If the property is 100% mortgaged (this is pretty normal), it costs $10,600 before tax refunds!

    That’s right – an average rental, that an average property investor buys now, is costing them $10,600 per year, before tax refunds.

    And that is at 4.5% interest rates. What happens if this goes up to 6.5%? The loss moves up to $21,500!

    Currently this average investor would be getting back around $5,000 in tax presuming highest tax bracket and some chattels to depreciate. So this brings the overall cost down to around $100 per week. Which is manageable to most investors.

    How is this new or average investor going to cope with no tax refund – down $5,000 or another $100 per week?
    Plus the extra compliance costs and hassle?
    Plus if there is no capital gain for 2-5 years?

    Then the biggie – WHAT IF INTEREST RATES GO UP? 1% would be another $100 per week.

    Can the average investor survive an extra cost of $200 per week?

    My thoughts from this;
    • If you are conservative - Wait, watch and hope the market collapses. Then buy some bargains in Ĺ to 3 years, that have opportunity to add value, maybe through subdividing.


    • If you are a little more aggressive - Same as above, but maybe some joint ventures, so that you are still doing things, but with lower risk. Also ensure the new purchases whether trades or holds, can cover themselves easily and don’t put you under pressure


    • Aggressive – I just don’t think it is worth going there at the moment


    • Buy in the bigger regions, such as Auckland, Hamilton, Tauranga and Wellington, where there is always buyers and tenants. Keep away from dying regions and little regions, especially if they rely on what industry. I always laugh to myself as each property cycle comes around and talk slowly moves to lets buy in Tokoroa or Whanganui!

    My best advice at the moment, is take your time and don’t be afraid to get some advice and ask for help. Your local property investor association is a great starting place! www.nzpif.org.nz

    What do you think?

    Ross
    Last edited by Perry; 28-10-2017 at 08:35 AM. Reason: formatting
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  2. #2
    Join Date
    Sep 2007
    Location
    Auckland
    Posts
    7,539

    Default

    Yes it can all change on a dime.

    Suddenly people are sick and tired of the damage to the property, the late rent, topping up the mortgage, no capital gains etc. etc.

  3. #3
    Join Date
    Dec 2015
    Posts
    295

    Default

    So many bad assumptions and fearmongering. The “65% of property investors have negative cash flow” and ‘people buying $550k properties with 100% mortgage - (this is normal)” are hilarious.
    Last edited by Perry; 28-10-2017 at 08:35 AM.

  4. #4

    Default

    Quote Originally Posted by Kbkiwi View Post
    So many bad assumptions and fearmongering. The “65% of property investors have negative cash flow” and ‘people buying $550k properties with 100% mortgage - (this is normal)” are hilarious.
    Ross is a property accountant so I trust that he actually know what is happening out there ....

  5. #5
    Join Date
    Oct 2013
    Posts
    1,467

    Default

    I don't know about the 65% negative, but at-or-near 100% mortgages are absolutely normal. Again, from the perspective of a property accountant who sees more investors than you do.

    EDIT: On the 'fearmongering', most accountants are conservative. It pays to be conservative. Can you imagine if your accountant was balls-to-the-wall aggressive and recommended everyone did very high-risk-high-return investments? Over the last few years they'd have some very happy clients! But as soon as things turn around, you're going to have some mad ones, potentially lawsuits.

    Much safer to point out the negatives. People are perfectly capable of seeing positives all by themselves.
    Last edited by Anthonyacat; 28-10-2017 at 08:39 AM.
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  6. #6

    Default

    Quote Originally Posted by Rosco View Post
    The property market has already turned, or is showing signs of turning. LVR rules have had a huge impact, and I was getting set for a consolidation phase. My prediction was that the market would go flat, and that in 2-3 years there would be some desperate vendors, therefore some opportunities to pick up some bargains.

    Ross
    Interesting. Are you seeing this anecdotally from first hand experience/clients or through the monthly stats.

    It will also be interesting to see how the foreign ownership ban comes into play. Pundits will frequently say that its only 3% (which is debatable) but when the government starts to implement a series of measures then the cumulative effect can be greater than the sum of its parts.

    I'm watching the world closely right now and I think we're at a major turning point as cracks are appearing in key markets (NYC, London, Sydney etc).
    Last edited by donna; 30-10-2017 at 02:55 PM.

  7. #7
    Join Date
    May 2004
    Posts
    2,253

    Default

    Changes to financials for property investors, short or long term, will drive decisions. Some of those changes, though flagged, are uncertain in their detail and impact. We do know that there will be impacts and that some of those impacts will devolve to tenants in the form of money and rights. It is not a simple equation. There are many factors at play, not least of which is the 'greedy, evil landlord' meme. My pick is that will most affect the many small landlords out there with 1 or 2 rentals.

    I agree with rosco that the inability to claim negative net rents against other income is big. Few purchasers in the last 5 or even 10 years will be cashflow positive.

    If PIF does another survey it would be interesting to ask the question.

    I suppose IRD has the big picture information but I can't see where they report it. The policy does have a forward impact, though, as losses will be carried forward and become a liability for a future government. A change in legislation will presumably take this into account, but not holding my breath on that.

  8. #8

    Default

    The inability for landlord to offset property losses against other income does little more than defer the cost to govt as accrued losses will be offset at some point. It's not quite a zero sum game because not all investors will get to a positive position in order to use accrued losses.

    there will be some initial impact to investors but very quickly investors will find ways to balance their Growth chasing (negative) properties with positive cash flow properties to offset their losses immediately.

    this will drive cashflow positive property prices up.

  9. #9
    Join Date
    May 2004
    Posts
    2,253

    Default

    Investors will also look for ways to reduce their net costs until the tax losses can be used. Minimum or deferred maintenance. Increased rents. Maximum bonds. More rigorous tenant selection. Termination of marginal tenants. A harder line with recovery of bond money for damage.

  10. #10
    Join Date
    Jun 2013
    Posts
    2,051

    Default

    Quote Originally Posted by WINZ View Post
    It will also be interesting to see how the foreign ownership ban comes into play. Pundits will frequently say that its only 3% (which is debatable) but when the government starts to implement a series of measures then the cumulative effect can be greater than the sum of its parts.
    Most property investing is driven by an expectation of future prices being higher than current prices. If expectation shift to future prices being lower, the market adjusts immediately, buying simply stops dead.

    It only takes the 'straw that breaks the camels back', no need for a single dramatic change.


 

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