Property Investments Your guide to the basics of - PROPERTY 101 - Property Investors Club
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PROPERTY 101
Your guide to the basics of
Property
Investments
Christchurch This guide has been written to provide
general information only and should not constitute
personal advice.
There is more than one way to invest in property successfully.
There is more than one way to invest in property
There are multiple different strategies to consider, each with a different risk profile.
successfully.
The key to being successful in your own right is to identify the strategy which fits your
own budget and capacity for risk.
Our Property Club members are usually looking for some balance between how their weekly
There areisthree
cashflow long
affected, term
and thestrategies forof
ultimate goal you to consider:
making large gains long-term. The Property
Growth
Investorsstrategy Disregarding
Club promotes rental income
an investment isto
strategy the pursuit
suit of maximum capital gains.
this ‘middleground’
Yield strategy Sacrificing capital gains in the pursuit of maximum rental income, for
Some investors
positive prefer
cashflow weeka speculative
to week. investment strategy, whereby large amounts of money
are made or
Balanced lost quickly,
strategy based on
A balanced the of
level investors prediction
both capital gains ofand
howrental
property valueswhere
income, will move
in the short
growth term. Other
is prioritised but investors
limited will be chasing
to the higher
investors ‘yields’ - income
expendable meaningbetween
their goal$0
is to
&
$200 per week.
purchase properties which can earn them a high rental income, relative to the original
purchase price of the property. Often positive cashflow can be achieved, rather than longer
Our
termProperty Club members
capital growth. areend
At the other usually looking
of the scale isfor
thesome balance
growth between
strategy, how their
where rental
weekly cash flow is affected, and the ultimate goal of making capital gains long-term.
income is disregarded entirely, to achieve the maximum amount of gains over a long period
The Property Investors Club primarily promotes a Balanced investment strategy to suit
of time.
this ‘middleground’, which forms the basis of this Property 101 guide.
Types
Typesof
ofinvestment
investment Example
Example Upside
Upside Downside
Downside Suitable for for
Suitable Risk
strategies
strategies
Speculative
Speculative House
House Potential
Potentialfor
for very BoomBoom
or bust,
or bust, Investor with high
Investor High
with high net
Usually buying and selling
Usually buying and selling
‘Flipper’
'Flipper'
very fast and
fast and high profit
dependent on short
dependant on short
net worth who can
worth who can afford to
frequently high profit erm property value afford to lose some.
frequently term property value lose some. High tolerence
movement High tolerance for
movement risk. for risk
Yield
Yieldfocussed
Focussed Apartment
Apartment No
No weekly
weekly cash Properties
cash input less likely
Properties Low income earnerLow
Low income
less likely who
Chasing high rents to owner input required to increase in value earner who needs
Chasing high rents to owner required to increase in value additional
needsweekly
additional weekly
remain cashflow positive over long period of
remain cashflow positive
time over long period of cash income.
cash income.
ShortShort term
time term focus butadverse to risk.
focus but
adverse to risk.
Possibly
Possibly already retired
already
soto
retired needs
needsongoing cash
ongoing cash
supplemet
supplement.
Balanced
Property Investors Club Invests
Invests in Potential
Potentialfor
for high Unlikely to make
Unlikely short short
to make A home owner
A home owner withMedium
good
Balance between yield and in family high gains over termsterm
gains with good equity
Balance between yield family gains over 10 year gains equity
level who canlevel who can afford
growth focussed homes or 10 year period
and growth focussed homes period affordsmall weekly
small weeklypayments.
townhouses
to rent payments. Prepared
Prepared to sacrifice short
to sacrifice short
term term
gainsgains
for for safer
investment
interim Growth.
Growth
Growth Focussed
Focussed Land
Land Very
Veryprofitable Expensive
profitable and holding
Expensive holding Cash-rich investor. High
investor.
Cash-rich
Sacrificing yieldto
Sacrificing yield tomake
make banker
banker safe costscosts Probably able able
Probably to to buy land
greater long term gains buy land without
greater long term gains without bank finance and
from increasing property bank finance and
from increasing property no requirement for rental
values no requirement for
values rentalincome
income
Your guide to the basics of Property Investments 012
We structure Property Club
structure Balanced investments
Strategy to achieve
investments to
achieve the following
the following goals: goals:
ü Long term growth for high capital gains.
ü Minimal financial impact on your current lifestyle.
ü Passive, hands off investment - Fully managed.
ü 10 year plan with revision as required to increase profitability of investment.
ü Limited negative impact on lifestyle during downturns.
What you’ll need…
Property investment is simply not an option for some - It requires you to already have a
significant level of equity (usually from owning a home for a few years).
Generally speaking, your net worth needs to be equal or greater than 20% of your home’s
value, plus $120,000, to purchase your first investment. For example, if your home is worth
$500,000, you’d need a mortgage less than $280,000.
Net worth = Assets - Liabilities
Home Value
Net worth < + $120,000
5
Home Value
Net worth > + $120,000
5
In addition to having enough equity, we’ll also need to satisfy the bank that you have
sufficient income to repay your new loan/mortgage. The bank will consider your regular after-
tax income, typical expenses, and usually 75% of your new rental income which is forecast.
Your guide to the basics of Property Investments 3
02
Important factors to consider about this CF
strategy:
Some
ü
reasons why property
The limit on your CF should be sufficient to cover your ‘worst-case’ scenario. We
investment is so popular
recommend a minimum of $20,000.
ü Additional interest costs will need to be serviced beyond the period of lower
rent, until the CF is paid up to zero balance
Leverage again. of more than 6%pa, to date, and
average
Unlike most other investment types, banks positive growth is achieved in any 7 year
ü Your weekly
are willing cash
to lend the contribution
majority of yourwill increase as the
period of total
thoserent shortfall increases
records.
over time.
investment, so you get a higher return on
Inflation
your own cash input.
Because rent rates and property values
ü Your profit will be negatively affected by the full amount of the shortfall and
Rental Income generally increase with or beyond inflation,
interest payments.
The regular earning potential from rent is a it is an attractive passive income, long-term
powerful offset against your interest e.g. throughout retirement your income
payments, and will provide passive would increase with inflation.
income(Capital Gains) in later years.
Growth
AKA ‘appreciation’, the increasing value of
your property is a reliable long term profit
and usually the most substantial benefit of
investing.
History
According the REINZ records, since 1992,
Median house prices have grown by an
Your guide to the basics of Property Investments 094
03
Yield vs. Growth
The Numbers - 10 year comparison
27 year average growth
When you invest in property there are really only It’s generally accepted that when you are choosing
= 6.51%
two thingsper annum
you’re looking for. Capital gains and a property, higher growth will come at a cost of
rental income - preferably as much as possible. lower yield and vice versa. They’re both on the
Yield vs Growth
same spectrum though, so it’s not like you get one
Info
As investors, we measure capital High Yielding Property
gains in terms of and not the other.High Growth
It’s just Property
a question of scale.
‘growth’. Rent is measured in terms of ‘yield’. So when
you hear about growth, think about your property
Initial
increasing valueWhen you hear yield,
in value. $500,000
think of $500,000
tenants paying you rent.
Think of Yield as what you get paid Houses in high-end neighborhoods are the
Cashflow
regularly, per week
and Growth $100 income
as how much your $100
opposite – Low expense
Yield, High Growth.
Yield
property increases in value.
Growth
600k rate 3% p / a 6% p / a
Growth
This will net you a better return in the long
run, if you can sustain the drain on
Yield
Both areisimportant
the rental return
if you based onsucceed in
want to Growthcashflow.
your monthly is the rate in which the value of
the value
Growthofafter
your10investment
years $171,958 your investment
$395,424 will increase over time
the New Zealand property market. You need
yield, to repay the bank for your mortgage, Most investors prefer something in the
Annual Cashflow $52,000 ($52,000)
Median Values $
but
It yield that
happens won’t be
way a significant
because contributor
it’s land that gives you middle
So – A good
when you’re house, in
out shopping foraa good area.
property, whatever
to your
growth retirement
and
400kNet savings.
buildings which
Profit Fora$223,958
give you that,
yield.you
Land Enough
your budget,rent to
some pay
of most
your
$343,424
moneyof the
goesmortgage
to land, and
goes up in value, but people aren’t lining up to rent the rest into the building. Your land budget will always
need Growth.
a bare piece of land. Meanwhile, buildings actually eachatmonth,
come alongside
a cost to reasonable
your building, longwill
so your growth
depreciate, but that’s what your tenant is going to be always come at a cost to your yield.
paying you for.
Growth
Yield Growth
The 200k
growth rate is a measure of how fast your property increases in value each year. In the
main centres you can expect 5% growth per annum for a regulat house. Some years it’s
more,Yield
someisyears
the rental return
it’s less, Growth
but that’s a conservative average is on
based the rate in which
historical trends.
based on the value of your the value of your investment
investment will increase over time
0.00
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10
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9
8
8
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6
3
6
13
16
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2
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20
It’s important to know this because when term growth, to build your wealth.
you’re choosing an appropriate Here we look at two example scenarios -
Year
property to buy, you’ll generally be trading One high yielding apartment with 3% growth
off one for the other. If it’s got a great and one family home with 6% growth. You’ll
Yield, it’s probably got less growth potential. see the net profit is significantly different
after 15 years.
Apartments are a typical example of this –
high yield, low growth. This might be
appropriate if you need to increase your
regular cash income.
Your guide to the basics of Property Investments 115
04
10
Important factors to consider about this CF
strategy:
Planning for the worst
Yield
The limit on your CF should be sufficient to cover your ‘worst-case’ scenario. We
ü
recommend
Technically, yieldaisminimum of $20,000.
a measure of your annual rental return against the amount
you paid
While for forecast
we can your property. There’s
higher property Gross yield and
While Netinvestors
most yield. Gross yield istosimply
are unlikely notice a
comparing
values over arent
Additionallongto purchase
term,
interest price
investors
costs will whereas
lose
need Net yield
dip in
to be serviced factors
property
beyond in period
costs
values,
the as
of well.
the real problem
lower
ü
money when
rent, they
until thefail
CFtoisplan
paidfor
updownturns could
to zero balance arise if you are forced to sell during
again.
in rent or dips in values, in the short to this ‘Critical Hold Period’, but you also don’t
medium term.
Your want
weekly cash contribution will increase times
as the of lower
total than forecast
rent shortfall rents to
increases
ü
over time. Rent negatively
per week impactxon52
your lifestyle.
Gross Yield =
Price of property
ü Your profit will be negatively affected by the full amount of the shortfall and
Critical
interest hold chart
payments.
(Rent per week x 52) – Operating costs
Net Yield =
Price of property
Value $
Critical Hold Period
Varying Growth and Yield
The level of yield and growth you get from your property investment, though
Rent Shortfall
forecasting is always speculative to a degree, is your decision to make, based on
what you buy and where. Decide how much weekly cash income are you prepared
to forego in the pursuit of capital gains, then choose accordingly.
Actual Rent Forecast Rent Property Value
Time
Your guide to the basics of Property Investments 6
07
09
Property
The Type- 10 year comparison
Numbers
To get through those difficult times, you
it - at which point you will need to pay the
We categorize property into four types - apartments, townhouses, houses and land -
may be eligible for a revolving credit facility interest costs on the additional borrowed
written in this order which illustrates the size of the land each type has, relative to the size
which
of the will provide
dwelling. you
The with
more additional
land, the morebank
growth youmoney.
can expect, but lower yield.
finance to subsidise your additional
Yield Info
vs Growth High Yielding Property
‘unexpected’ costs such as rent shortfalls.
We call this a Contingency Fund (CF).
High
For example, if youGrowth Property
had to endure a 2 year
period of $50pw lower rental income, rather
Initial value $500,000 than paying an$500,000
additional $50pw out of your
Think
A CF isoflike
Yield
an as what you
overdraft, get
but paid
tied to your Houses in high-end
own cash reserves, youneighborhoods aredraw
would instead the
Cashflow
regularly, and per week
Growth as how $100 income
much your opposite – Low$100 expense
Yield, High Growth.
mortgage so generally has a much lower down $50pw from the CF, and merely
property increases
interest rate; in value.
equivalent to the standard This willthe
service netinterest
you a better return in the long
cost (approximately
Growth rate 3% p / a 6% p / a
variable rate of the day. This means it costs run, if you can sustain the
$5pw @ 5%pa) of that additional drain on
borrowing.
Both are important
you nothing unless if you
you want toneed
actually succeed in
to use your monthly cashflow.
Growth after 10 years $171,958 $395,424
the New Zealand property market. You need
yield, to repay the bank for your mortgage, Most investors prefer something in the
Contingency fundcontributor
contributions
Annual Cashflow $52,000 ($52,000)
but yield won’t be a significant middle – A good house, in a good area.
to yourNet
retirement
Profit savings. For $223,958
that, you Enough rent to pay most of the mortgage
$343,424
need Growth. each month, alongside reasonable long
Type Yield Growth
Yield
Apartment High Low Growth
Townhouse Average Average
Additional Loss of Profit
Yield
House is the rental returnLow Growth Highis the rate in which
Amount paid with CF
based on the value of your the value of your investment
Cost $
Bare Land None Very High
investment will increase over time
Location
The other way to vary your position on the scale of yield and growth, given the same
property type, is to shift from an expensive neighbourhood to a cheaper one. For example,
It’s important
if you to wanting
are set on know this because when
a townhouse, term growth,
but aren’t satisfied to build
with the yield your wealth.
of the property, you
can increase the yield by finding a similar townhouse in a cheaper neighbourhood. Because
you’re choosing an appropriate Here we look at two example scenarios -
the purchase price is likely to be less, but rental income would be similar, your yield will
property to buy, you’ll
increase. Normal generally
rules apply be trading
though One high yielding apartment with 3% growth
- expect less growth.
off one for the other. If it’s got a great and one family home with 6% growth. You’ll
Total Rent Shortfall Total Cash Cost Total Lost Profit
Yield, it’s probably got less growth potential. see the net profit is significantly different
after
Time15 years.
Apartments are a typical example of this –
high yield, low growth. This might be
appropriate if you need to increase your
regular cash income.
Your guide to the basics of Property Investments 117
08
10
The Numbers - 10 year comparison
Some reasons
Info
why property
Yielding Property High Yielding Property
Growth Property High Growth Property
investment is so popular
Initial value $500,000 $500,000
Cashflow per week $100 income $100 expense
Leverage
Growth rate 3% p / a average of more
6% pthan
/a 6%pa, to date, and
Unlike most other investment types, banks positive growth is achieved in any 7 year
are willing to lend
Growth after the majority of
10 years your
$171,958 period of those records.
$395,424
investment, so you get a higher return on
Annual Cashflow $52,000 Inflation ($52,000)
your own cash input.
Because rent rates and property values
RentalNet
Income
Profit $223,958 generally increase with or beyond inflation,
$343,424
The regular earning potential from rent is a it is an attractive passive income, long-term
powerful offset against your interest e.g. throughout retirement your income
payments, and will provide passive would increase with inflation.
income(Capital Gains) in later years.
Growth
AKA ‘appreciation’, the increasing value of
your property is a reliable long term profit
and usually the most substantial benefit of
investing.
History
According the REINZ records, since 1992,
Median house prices have grown by an
Your guide to the basics of Property Investments 8
11
03
The market cycle
27 year average growth
It’s generally accepted among economists that the property market follows a somewhat
= 6.51% pertrend
predictable annum
- That every ten years or so, we experience a cycle of different stages.
The Property Selection Process
A boom, a slump, then a recovery.
• Houses sell faster
• Prices increase quickly
Many of our members who decide to purchase their•first
• Confusion investment
Buyers run back toproperty
market
bought their home
• Prices increase many years ago, so here we remind you of how the
gradually
• Demand outstrips supply
process works:
600k
You will need to appoint a solicitor or conveyancer / legal representative to ensure that the
contract is in your best interest and does not contain any unsatisfactory
• Houses on terms. Makelonger
the market sure
you know your legal representative’s qualifications and exactly whatbuyers/sellers
• Less service they are
Median Values $
offering. • Prices fall or stagnate
400k
Your legal representative should:
ü Check
When LIM and
the Boom phase PIM for any potential
commences the complications
The recovery phase happens quickly, as we
mediaArrange
will tell you
for it’s
the unsustainable
exchange of and will
contracts transition from slump to boom. Blink and
ü
end in a crash. Property prices rise Rents you’ll miss it. Rents begin to increase. Days
ü 200k
rise, Give advice
though not ason the
fast asproperty
property contract
prices, so on the market are fewer. Buyers are paying a
you’llNegotiate
find yields terms
are lower for new purchases.
with the vendor’s solicitor little more for that bigger house. The boom
ü
Properties sell much faster. is coming and you’ve got every reason to be
ü Facilitate the settlement process excited, but if you’re waiting for this time to
The slump is usually the shortest phase in the
Deal with any difficulties that arise duringbuy
theyour first rental
settlement property, you’ll probably
period
ü
property cycle. Contrary to popular opinion
never own one.
property
Holdvalues don’t necessarily
any deposits paid in afall during
trust a
account
ü 0.00
Slump, they just stay the same. Professional investors buy at all stages of the
market cycle.
0
10
9
9
8
8
18
3
6
3
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17
0
9
0
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9
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20
There are a couple of things in play that
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protect us from falling values: Whatever stage in the market cycle we’re
1. Kiwis don’t like selling their house for currently in, be it a hot market or a cool one,
less than they thought it was worth. there are advantages to being a buyer in
2. Falling prices are bad for the economy, Yearboth. The advantage of a hot market - you
so our government will use monetary hopefully get to enjoy riding that wave for
policy to prop up falling demand. a while after you purchase. What’s better
They’ll also pull those levers the about a cool market though - you’ll have
opposite direction when they feel the more choice and less pressure to pay top
market is too hot. dollar and can buy into higher yields.
You’ll also see higher rates of vacancy in the
slump. Properties on the market for longer.
And you’ll notice the odd Mortgagee sale.
Your guide to the basics of Property Investments 9
12
04
The market cycle continued
27 year average growth
= 6.51% per annum
Some reasons why property
RECOVERY
RECOVERY
RECOVERY
SLUMP
SLUMP
SLUMP
BOOM
BOOM
BOOM
investment is so popular
Leverage
600k
average of more than 6%pa, to date, and
Unlike most other investment types, banks positive growth is achieved in any 7 year
are willing to lend the majority of your period of those records.
investment, so you get a higher return on
Inflation
your own cash input.
Median Values $
Because rent rates and property values
Rental
400k Income generally increase with or beyond inflation,
The regular earning potential from rent is a it is an attractive passive income, long-term
powerful offset against your interest e.g. throughout retirement your income
payments, and will provide passive would increase with inflation.
income(Capital Gains) in later years.
200k
Growth
AKA ‘appreciation’,
Median property thevalues
increasing
overvalue
timeoftell the story of the property market cycle.
your property is a reliable long term profit
and usually the most substantial benefit of
The biggest fear many first-time investors Property investment is a long term game. If
investing.
have is that they will buy a property at the you own your investment for 10 years (and
0.00
wrong time in the market cycle. Property you should always plan to hold at least that
History
values have dipped before and will likely dip long), you will probably experience a period
0
10
9
9
8
8
18
3
6
3
6
13
16
2
2
12
4
4
14
5
5
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1
11
7
7
17
0
9
0
9
0
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According
again. Theythe REINZ
worry thatrecords, since
if you buy 1992,
a property at some point when values drop a bit.
today,
Medianit’ll be worth
house less
prices tomorrow.
have grown by an If you lack the confidence to invest in
If this sounds like you, we recommend property, the key is to focus on what your
implementing a long term growth strategy Year
property would be worth in 10 or 20 years.
with a balanced yield objective that will The only people who lose money in real
cover your regular weekly outgoings. Here’s estate are those who sell at the wrong time.
some points to consider: It’s not the people who buy at the wrong
time.
The only time property values matter are on
the day you buy and the day you sell. The
lame roller coaster in between those two
days is boring and irrelevant, provided you
have sufficient rental income to sustain you.
Your guide to the basics of Property Investments 10
03
04Risks
27 you growth
year average need to consider
Risks
= you need to consider
6.51% per annum
Interest Down-turns
Risks you need to
Interest
consider
Rates are currently the lowest on record,
Down-turns
While long term growth is reliable, property
but that won’t last forever. Investors who values have decreased at times. Without
Rates are currently the lowest on record, While long term growth is reliable, property
aren’t budgeting for higher rates in the the financial capability to retain your
but that won’t last forever. Investors who
Interest values have decreased at times. Without
Down-turns
future could find themselves in trouble. property during tough times, investors can
Rates budgeting
aren’t forthe
are currently higher rates
lowest onin the
record, the financial
While capability
long term
find themselves growth to retain
having is
your
toreliable,
sell theirproperty
future
Tenants
but could
that find
won’t themselves
last in trouble.
forever. Investors who property
values during
have tough times, investors can
properties atdecreased
a loss. at times. Without
600k
Without
aren’t proper pre-tenant
budgeting for higherscreening, you
rates in the find themselves having to sell their
the financial capability to retain your
Tenants Vacancy
properties at a loss.
could find
future yourself
could needing toinevict
find themselves bad
trouble. property during tough times, investors can
Without proper pre-tenant screening, you It can take somehaving
time toto
get tenants
tenants and chasing money owed for find themselves sell their if you
could find yourself needing to evict bad Vacancy
Tenants
damage or unpaid rent. set your rent price
properties at a loss. too high.
tenants proper
and chasing money owed for you It can take some time to get tenants if you
Median Values $
Without pre-tenant screening,
damage
Process oryourself
unpaid rent. set your rent price too high.
Vacancy
could find
400k needing to evict bad Regulations
Legislation
tenants anddesigned for the protection
chasing money owed for of It can take
There havesome time
been to get tenants
a number if you
of tough
Process
tenants rights make
damage or unpaid rent.property managers set your rent price
regulations too high.
introduced in
recent times,
Legislation designed for the protection of mostly in a bid to take some heat out
responsible for adhering to strict rules which
tenants rights make property managers
Process of the booming market. Tax changes,
can be costly if broken.
responsible for adhering to strict rules which tenancy regulations, healthy home
Legislation designed for the protection of
can be costly standards and banking rules have all
200k
tenants rightsifmake
broken.
property managers been tightened, but there could be
responsible for adhering to strict rules which more to come.
can be costly if broken.
0.00
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20
20
20
20
20
20
19
20
19
19
20
20
20
19
20
19
20
19
20
19
20
19
20
Year
Your guide to the basics of Property Investments 05
Your guide to the basics of Property Investments 05
Your guide to the basics of Property Investments 11
04
05Mortgage Structures
Structuring your home loan efficiently This structure provides you the
can shave years off your mortgage, opportunity to save thousands on interest,
and it's not an expensive or which is calculated daily at the variable rate,
complicated process. by ensuring every available dollar you have
is taken off your mortgage value.
Off-set Accounts
Most banks will offer you an 'off-set account' Off-set accounts are incredibly
or 'revolving credit'. They operate like a large powerful debt reduction tools for
overdraft, for a portion of your mortgage, people who:
from which you can manage your day-to-
day spending, and direct your income to. Can resist the urge to spend
ü
This way, for example, the day you get your additional funds which are made
Paycheck, you stop paying interest on that available.
amount of money, until you
ü Have irregular income.
spend it.
ü Earn more than they spend.
ü Usually have cash reserves held in
a savings account.
Years reduced from
Mortgage Value
mortgage
Interest saved within
off-set account
Standard mortgage Re-structured mortgage with
Year
structure off-set account
TIP: If you’re good with money, you can use interest free periods on your credit card,
for month-to-month expenditure, to save more on your mortgage.
Your guide to the basics of Property Investments 12
06Planning for the worst
While we can forecast higher property While most investors are unlikely to notice a
values over a long term, investors lose dip in property values, the real problem
money when they fail to plan for downturns could arise if you are forced to sell during
in rent or dips in values, in the short to this ‘Critical Hold Period’, but you also don’t
medium term. want times of lower than forecast rents to
negatively impact on your lifestyle.
Critical hold chart
Value $
Critical Hold Period
Rent Shortfall
Actual Rent Forecast Rent Property Value
Time
Your guide to the basics of Property Investments 13
07To get through those difficult times, you it - at which point you will need to pay the
may be eligible for a revolving credit facility interest costs on the additional borrowed
which will provide you with additional bank money.
finance to subsidise your additional
‘unexpected’ costs such as rent shortfalls. For example, if you had to endure a 2 year
We call this a Contingency Fund (CF). period of $50pw lower rental income, rather
than paying an additional $50pw out of your
A CF is like an overdraft, but tied to your own cash reserves, you would instead draw
mortgage so generally has a much lower down $50pw from the CF, and merely
interest rate; equivalent to the standard service the interest cost (approximately
variable rate of the day. This means it costs $5pw @ 5%pa) of that additional borrowing.
you nothing unless you actually need to use
Contingency fund contributions
Additional Loss of Profit
Amount paid with CF
Cost $
Total Rent Shortfall Total Cash Cost Total Lost Profit
Time
Your guide to the basics of Property Investments 14
08Important factors to consider about this CF
strategy:
ü The limit on your CF should be sufficient to cover your ‘worst-case’ scenario. We
recommend a minimum of $20,000.
ü Additional interest costs will need to be serviced beyond the period of lower
rent, until the CF is paid up to zero balance again.
ü Your weekly cash contribution will increase as the total rent shortfall increases
over time.
ü Your profit will be negatively affected by the full amount of the shortfall and
interest payments.
Your guide to the basics of Property Investments 15
09What to look for in a property investment
The Property Selection Process
Rule #1
Don’t be emotional. This is a Rule #5
business. Never buy in a small town. They
Many of our members who decide to purchase their first investment property
often have vulnerable economies
bought their home many years ago, so here we remind you of how the
Rule #2 which depend on just a few main
process works:
Must be a house or townhouse on industries.
freehold land. It's the land which
You will need to appoint a solicitor or conveyancer / legal representative to ensure that the
increases in value, so make sure Rule #6
contract is in your best interest and does not contain any unsatisfactory terms. Make sure
know exactly which part you'll own. Always buy in a good or up-coming
you know your legal representative’s qualifications and exactly what service they are
Stay away from strata titles, area. Don't be lured by the appeal of
offering.
period. higher yields in cheaper suburbs.
Your legal representative should:
Rule #3
Preferably available pre-construction
ü Check LIM and PIM for any potential complications
(off-plan) for better purchase price.
ü Arrange for the exchange of contracts
This way, you’re not competing with
ü Give advicebuyers,
emotional on the who
property contract
can drive
ü prices upwards.
Negotiate terms with the vendor’s solicitor
ü Facilitate the settlement process
Rule #4
ü Deal with any difficulties that arise during the settlement period
Minimum 5% gross yield to ensure
ü Hold
yourany deposits
cashflow paid
is not in a
over trust account
exposed
and to allow for less desirable rent
increases.
Your guide to the basics of Property Investments 16
12
13Leverage - The main contributor
to high returns
There are a number of legitimate investment options out there, but it’s the ability to borrow
the bulk of your investment from the bank, which makes property number one. It means you
get a ‘return’ on your own investment, and the return on the bank’s investment too.
For example, would you rather invest $100,000 in a relatively safe company stock, with a
forecast return of 10%, or a property with just 6% return forecast?
Normal Investment Leveraged Investment
$100,000 @ 10%pa $100,000 @ 6%pa
Your Investment
Your Investment
Bank Funding
Bank Funding
Bank Funding
Bank Funding
Return $10k
$10k $6k $6k $6k $6k $6k
$10,000 $30,000
Your guide to the basics of Property Investments 17
14Most sensible investors would choose property at the lower 6% rate, because they can
borrow $4 for every $1 of their own money invested, making their potential return on
investment 5 times higher i.e. 30%.
The Alternatives
$100,000 plus additional $5,000 per year invested in to different investment types.
Capital growth comparisons
$400,000 Property 6%pa
Shares 10%pa
Fund 6%pa
$300,000 Mortgage 5% interest
Bank 3%pa
$200,000
$100,000
$0
2 3 4 5 6 7 8 9 10
Years
Your guide to the basics of Property Investments 18
15Project average annual population
change
By regional council area 2013 - 43
Auckland
Canterbury
New Zealand
Waikato
Bay of Plenty
Otago
Nelson
Taranaki
Welligton
Northland
Tasman
Marlborough
Hawke’s Bay
Manawatu - Wanganui
Gisborne
Southland
West Coast
-1 0 1 2
n Low projection n Medium projection n High projection
Source: Statistics New Zealand
Your guide to the basics of Property Investments 19
16Regional Hotspots
Population growth 2013 - 2023
Orewa / Albany: 53%
Hobsonville: 254%
Central Auckland: 47%
Beachlands / Drury: 54%
North Hamilton: 70%
Papamoa: 74%
Central Wellington: 25%
Central Christchurch: 83%
Southwest Christchurch: 105%
Central Otago: 29%
Provincial Possibilities
Source: Infometrics
Your guide to the basics of Property Investments 20
17Christchurch - An undeniable growth opportunity.
As cities grow, so too, do property values. We have an unprecedented opportunity on our
doorstep, to invest at ground level.
Your guide to the basics of Property Investments 21
18Christchurch is Under-Valued.
After several years of relatively stagnant property values, in a country which has otherwise
experienced rapid price hikes, key indicators suggest the price gap between Christchurch
and Auckland should be closing.
REINZ Housing Price Index
Auckland, Christchurch and wellington
7000
6000
5000
4000
3000
2000
1000
0
0
10
9
9
8
8
6
3
6
13
3
2
12
2
4
14
4
15
5
5
1
11
7
7
0
0
9
0
9
9
0
0
9
0
9
0
0
9
9
0
9
0
20
20
20
20
20
20
20
19
20
19
19
20
20
20
19
20
19
20
19
20
19
20
19
20
Auckland Christchurch Wellington
Source: REINZ Statistics
Your guide to the basics of Property Investments 22
19The "Southern Drift”
After a mass exodus following the 2011 quakes, Christchurch had little to offer in the way of
lifestyle. While the New Zealand population boomed, migrants headed for greener pastures
in the north. Several years on, though, the rebuild has created an amazing drawcard for
immigration.
Your guide to the basics of Property Investments 23
20We’re at a Tipping Point.
The key to investment is buying low and selling high. Property investment offers a safe
means of achieving this outcome, due to reliable long term growth projections, so the right
property purchase held for long enough is sure to yield positive capital gains, but choosing
the optimum time to buy will make a good investment a great one.
TIPPING POINT
“There's some form of electricity in the air and a lot more people are attracted to the city…
The city is now at a tipping point” - Tim Loftus, ChristchurchNZ
Your guide to the basics of Property Investments 24
22The numbers stack.
ü Average house value: Auck $1.04m, Well $664,000, Chch $494,000
ü Average weekly rent: Auck $557, Well $499, Chch $364
ü Median h/hold income: Auck $100,500, Well $102,100, Canty $87,600
ü Weekly grocery bill, young family: Auck $253, Well $356, Chch $244
ü Annual retail sales increase: Auck 3.8%, Well 2.3%, Chch 3.3%
ü Unemployment rate: Auck 4.3%, Well 4.5%, Chch 3.8%
ü Yearly rainfall: Auck 1211mm, Well 1215mm, Chch 618mm
ü Yearly sunshine hours Auck: 2008, Well 2110, Chch 2144
ü First home buyers income vs mortgage: Auck 40%, Well 31%, Chch 20%
Your guide to the basics of Property Investments 25
22How much can you afford to
How much can you afford to
invest(weekly)?
invest(weekly)?
We should all be saving/investing some money on a regular basis, but we all have a different
levelshould
We of available income to put aside,
all be saving/investing somewithout
moneysacrificing a comfortable
on a regular lifestyle.
basis, but we The
all have reality
a different
is, there is a property investment suitable to most, but generally the more you chose to
level of available income to put aside, without sacrificing a comfortable lifestyle. The reality
invest
is, each
there is a week (to meet
property short fall
investment of rental
suitable income
to most, butvsgenerally
mortgagethe
expenses and
more you otherto
chose
expenses), the more capital gains you would expect to make in the long term.
invest each week (to meet short fall of rental income vs mortgage expenses and other
expenses), the more capital gains you would expect to make in the long term.
Nothing. We need We’re pretty tight $100 is a Weekly
all our costs to be on cost but could comfortable expenditure isn’t
Nothing. We need We’re pretty tight $100 is a Weekly
paid for by rental afford $50 – 75 investment for us. really an issue for
all our costs to be on cost but could comfortable expenditure isn’t
income each week $120 is a push. us. We just want
paid for by rental afford $50 – 75 investment for us. really an issue for
the best.
income each week $120 is a push. us. We just want
the best.
Cashflow
Weekly
$
150+
Multilevel Good quality A typical house The bigger house
apartments on properties in some and land in an in the more
Multilevel Good quality A typical house The bigger house
‘strata’ titles will good areas are upcoming expensive
apartments on properties in some and land in an in the more
generally cover all available. Usually neighbourhood is neighbourhood.
‘strata’ titles will good areas are upcoming expensive
costs, even with with Multiple units your best bet
generally cover all available. Usually neighbourhood is neighbourhood.
extra income left in a block.
costs, even with with Multiple units your best bet
over to pay down
extra income left in a block.
your principal.
over to pay down
PROFIT
$89k
your principal. $145k $245k $397k
10YR
TIP: If you already have a good level of equity behind you, but your regular expendable
income
TIP: is limited,
If you alreadyyou may
have qualify
a good to 'capitalize'
level your weekly
of equity behind shortfall,
you, but by pushing
your regular out the
expendable
term of your home mortgage slightly.
income is limited, you may qualify to 'capitalize' your weekly shortfall, by pushing out the
term of your home mortgage slightly.
Your guide to the basics of Property Investments 23
Your guide to the basics of Property Investments 26
23We know a thing or two about property, but we also have help from some of the
best professionals
We know a thing or in Christchurch,
two to make
about property, your
but we property
also investment
have help journey
from some of theas
easy as possible, in the form of a one-stop-shop.
best professionals in Christchurch, to make your property investment journey as
easy as possible, in the form of a one-stop-shop.
Accounting
Mortgage
Accounting
Brokerage
Mortgage
Insurance Brokerage
Specialists
Insurance
Specialists
Vendors
(REA)
Vendors
(REA)
Legal
Advice
Legal
Advice
Valuers
Management Valuers
Management
Your guide to the basics of Property Investments 24
Your guide to the basics of Property Investments 27
24PROPERTY 101
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