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  1. #1

    Default newbie question - Auckland rental versus swapping investment to another region

    Hi, we are accidental investors rather than know what we're doing, so apologies if this is a stupid question.

    The question is, in essence, is Auckland the best place by far in NZ to keep a rental if you had one - or are there clear advantages to flicking it and buying a rental elsewhere?

    Through moving in together we live in my good unit in Wellington. And we have rented out my partners 70's house in Titirangi Auckland. It's your typical Titirangi bush surrounded... not too warm, not all that modernised, but nice family 4 bed, double garage, peaceful and pretty bush reserve bordering the section. Not my cup of tea livign in a bushy valley but some people love it.
    I was also keen he rent it out for a bit (rather than sell it) until we had more idea what we wanted to do property wise in the future. (We're feeling lucky to even have two properties in today's market on our incomes).

    But my partner feels a bit over that Auckland property and thinks about flicking it. Maybe buying another closer one to Wgtn he says, like Palmy North.
    But he feels he's getting 'nowhere' with it (interest only mortgage, still owes 400K on it, rent just covers that, capital gains flattened).

    What would your advice be to us "1 rental property as a nest egg people", who have an Auckland one... Would you say we're silly to spend much time thinking of exiting the Auckland one just on the 'feeling' that it's not feeling that close to my partner any more.

    I think it would still have a mortgage on a new rental closer to Wellington, but we may be able to P&I that one and make a dent it in. Unlike the Auckland one!

    Or is Auckland clearly ahead as the best place to keep a big rental property - that we already have our hands on?

    Cheers,

  2. #2
    Join Date
    Oct 2008
    Location
    Auckland/Melbourne/ whereever the money is
    Posts
    1,371

    Default

    As with most things, your personal circumstances and attitudes can make a big difference to what is right for you, but consider these:
    Are you ever likely to want to move out of Welly & back to Auckland ?
    Keeping a place in Akld will at least give you somewhere to move to & keep you in the Auckland property market,
    regardless of whether you end up staying in that place, or selling it at that time to change to something else.
    Auckland property prices have generally grown faster / ie getting better capital growth than most places,
    and even in the current slowdown it continues, just at a lower rate, so the gap between an Akld property & say Palmy will continue to increase, making it harder to get back into Akld market.

    Typically a Big property that you might buy for yourself to live in will not make an efficient rental, unless it can be divided up or rented by the room.
    Servicing the house cost far outweighs the rental return it can achieve & hence you have to subsidise it, which you may be happy to do if you / your children want to move into it at a later date, or if the capital growth makes it worth it, ie it costs you 100pw for a 1000 pw growth.
    Now that capital growth is slowing, the long term objectives become important, ie i am prepared to pay the holding costs to get through to the next period of growth because i want to use it in x years.
    Or i want to use the equity growth to finance another more suitable property for my purposes.

    There is a good supply of tenants in Akld & all the rubbish the current Govt is trying to force through is pushing rents up due to the extra costs/hassles/liabilities involved.
    These same costs/hassles/ liabilites would also apply to a Palmy rental, but most likely with less rent from which to finance, and also likely less rent increases due to lower demand.
    With high demand comes the ability to pick tenants more carefully, whereas in the regions it can be a matter of taking whatever you can get, which often can mean a more troublesome tenant.

    Hubby has had enough of current house but still interested in having a rental as a nestegg elsewhere, so will still be subject to same costs/hassles/ liabilities. Hand over to a property manager if you havent already.

    Regional rentals have a much higher risk of rapid loss of rental (& sales) demand due to the closure / reduction of a major business that supports the region.
    Think Tokoroa, loss of forestry workers, Dairy industry problems.
    Current Govt attitude to gas / oil exploration - New Plym may see significant downturn.
    or Perth / Broom where property / rental prices skyrocketed due to mining demand, & have now collapsed due to removal of that demand.
    Rents of 2000pw were supporting $mill prices for $400k houses & now that the demand has reduced rents to 500pw the houses cant be given away for 500k but still have $mil mortgages!

    Ring fencing of losses may impact you, if / when that comes in, so if the rent does not currently cover costs & he is subsidising the property, then it is a good incentive for him to raise the rent as much as the market will allow.
    This may still not cover costs, so you need to consider how much extra tax he will be paying on his salary due to loss of offsetting, and how long the property will take to get to the state of covering costs, because the ring fencing will mean the losses inbetween times cannot be reclaimed until such time as the property is paying for itself.
    In Palmy the property may be cash positive but the numbers (rent & capital growth) will be lower & hence you would likely need several properties to get the same increase in Equity / wealth.
    ie Akld property - higher rent but costs not covered, relies on capital growth, which when present may be much higher, making the property Equity positive while cash negative.
    If capital growth is not present then you will be equity neutral / negative at the same time as cash negative.
    For Palmy property - lower rent, may cover costs, but low capital growth, ie cash positive but after inflation may not actually be Equity positive.
    Potential Capital Gains Tax may have an impact on timing of property sales / purchase, but if you intend to keep a property long term then (unless CGT is assessed as an annual deemed rate of return, rather than just "on sale",) the only times it will affect you is when you are selling up, or selling to buy another.
    So if either of those are your intentions then it makes sense to get the property you want to keep long term, before CGT is implemented.

    For many, the anti-landord attitude this Govt has is enough to make them sell it all up & walk away, (& I have found myself considering this frequently over the last few months), but if you stay in the market, the returns are likely to improve along with the hassles.
    Again it is going to depend on your long term desires and capability to subsidise for extended periods until you get back into a period of capital growth or significant rent increase.

  3. #3

    Default

    Keith thank you so much this has given us lots to focus our thoughts on! Really appreciate it.
    Yep we need to understand the ring fence losses changes - as he is a freelance worker, with a good property minded accountant - so more conversations to be had there with the accountant me thinks to better understand the detail.

  4. #4
    Join Date
    Mar 2014
    Posts
    360

    Default

    If you ask a property investor if they have any regrets they will more than likely mention a regret in selling a property over anything else - Only buying something leaky without knowing comes to mind as a bigger mistake people tend to regret.

    Can you get more cashflow from the Auckland property by adding a room, adding a dwelling, subdividing etc? If so id look at that before selling. Otherwise if its limited in how more rent can be had then selling at this point to buy 1 or 2 higher yielding in a decent sized city (with growing population) like Palmy North wouldn't be a bad option - esp if your welly based and can head up there over the weekends and learn the market, talk face-to-face with agents etc. Palmy prices are increasing over 9% per year based on latest QV index so talking to a local agent in the market would be a good first step

  5. #5
    Join Date
    Apr 2004
    Location
    Auckland
    Posts
    1,856

    Default

    Keep it.
    There are a lot of costs in selling - agents fees (4%!), lawyers, etc.
    There is cost in buying again - lawyers, building reports, etc.
    You may also have to take a lower price to even get a sale at the moment.

    Maybe split your loan into $350K interest only & $50K line of credit.
    Pay off the $50K LOC as fast as possible - then repeat.
    You'll be surprised how fast you can progress doing this (unless you slip up and spend that equity on nice shiny things!)
    The three most harmful addictions are heroin, carbohydrates and a monthly salary - Fred Wilson.


 

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