When to hold, when to fold
By Diana Clement
Buy and hold is the mantra for most property investors. Over the years the mortgage is (hopefully) whittled down and eventually the cash flow from the property or the capital could help fund your retirement.
The reality is that property investment doesn’t suit some people and certain properties can become “problem children”, says Andrew King, executive officer of the New Zealand Property Investors Federation (NZPIF). In that case investors sometimes decide enough is enough. King had his own “problem child” on Great North Rd in Waterview. He bought the property to let it to international students. But when student numbers dropped he found suitable tenants harder to find. For a few years groups of young Kiwi flatmates came and went from the four-bedroom standalone bungalow. The reality was that the house was badly laid out and didn’t appeal to this market. “It was on a main road and it didn’t have a lot of living space,” says King. “The layout was awkward and it turned over quite frequently. It just never seemed to work.”
The best rental properties attract long term tenants who treat the property well and pay their rent on time. King’s Great North Rd property never manage to achieve that, he sold it and bought a RoomMate Cabins franchise. As well as problem properties, there are always some investors who will find the ownership and management of any rental property just too stressful. Often these are accidental landlords who have inherited a property. Or they may be people who think that buying investment property is an easy way to wealth and don’t realise how much work is involved.
Specialist property accountant Amanda Watt, of Crowe Horwath, is a seasoned property investor, but had to take a back seat in managing properties that she had previously lived in and cherished. She left the day-to-day management to her husband. “I didn’t want to know what the tenants were doing,” says Watt. Some investors who can’t manage their property or don’t have the time will use a property manager, says Paul Foster, of Iron Bridge Real Estate. This takes away the tenant management and rent collection hassles.
Even with the management outsourced, an investor will still have paperwork and accounting to do. There are also worries if the rent doesn’t cover mortgage payments and the owner has to fund this from their day job income. Or worst-case scenarios, such as tenants cooking or using methamphetamine in a property, can put owners off. Watt says that from an accounting perspective investors who can’t afford to pay for maintenance may choose to sell a property and reduce their debt. She has seen cases where the home needs a new roof or other expensive maintenance and the investor just couldn’t afford to do the work.
Financially it’s best to hold the property if possible, says Watts. But sometimes that simply can’t be managed. Watt expects that legislation requiring landlords to insulate and add smoke alarms may push a portion of them into this bracket. On the other hand, King says landlords who can afford to insulate are finding that they can put the rent up $10 to $15 a week to cover the costs. Warm, dry homes are easier to let and command higher rents. That may not be the case when all properties are insulated.
Every property is different, but Watt puts aside between five and 10 per cent of rent for maintenance on each of her properties. Heavily leveraged investors who are struggling just to top up the rent may not be able to do this. The Reserve Bank of New Zealand’s loan to value ratio restrictions mean that investors are less likely to be in this position now, says Watt. The other financial reason for selling, says Watt, can be low yields. Rental yield is the income on a property expressed as a percentage of its value. Currently Auckland properties range in yield from 1.3 per cent in Epsom to 5.6 per cent in central city apartments. It’s a rare property in Auckland where the rent covers the mortgage, let alone other costs such as insurance, rates, and maintenance.
Yields have worsened in the past few years as rental increases haven’t kept pace with rising property prices. Foster has seen some landlords put tired properties up for sale. Typically they wait until the end of a tenancy. As investors hit retirement age some may sell a few properties to pay down debt and leave themselves in a cash flow positive environment, he adds. Foster says most continue to hold on to investment properties during retirement. Some, as they age, will choose to use a property manager to farm out the day-to-day management.
Source: NZ Herald