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;
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;
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
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 ½ 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
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