09-03-2009
House party back on - for lucky few
With another official cash rate cut expected next week, experienced and less-seasoned property investors are looking at the housing market and seeing more reasons to buy.
And conditions will only improve. BNZ chief economist Tony Alexander expects the rate will get to just 2 per cent by the middle of the year. He also forecasts that real estate sales have almost reached their weakest level.
Longtime property investor and Acumen financial adviser Lisa Dudson is calling this the best market for property investment that she has seen in seven or eight years. It is now possible to buy positive cashflow properties - properties whose rent will cover the main expenses, such as the mortgage.
The only problem is persuading the bank to lend you money, Dudson says.
In this market there is a new set of rules, and investors are borrowing some tricks from the United States.
Dudson says professional investors with networks will have more success finding positive cashflow properties than less-seasoned players.
With another official cash rate cut expected next week, experienced and less-seasoned property investors are looking at the housing market and seeing more reasons to buy.
And conditions will only improve. BNZ chief economist Tony Alexander expects the rate will get to just 2 per cent by the middle of the year. He also forecasts that real estate sales have almost reached their weakest level.
Longtime property investor and Acumen financial adviser Lisa Dudson is calling this the best market for property investment that she has seen in seven or eight years. It is now possible to buy positive cashflow properties - properties whose rent will cover the main expenses, such as the mortgage.
The only problem is persuading the bank to lend you money, Dudson says.
In this market there is a new set of rules, and investors are borrowing some tricks from the United States.
Dudson says professional investors with networks will have more success finding positive cashflow properties than less-seasoned players.
Ashley Church, who runs property investors group PropertyPlus, is experimenting with new ways of finding the right deals. He is using "yield pricing", a strategy in which he sets the return he wants before he approaches the vendor. If you decide you want a 7.5 per cent return, you do your figures based on average rentals for the area to see what you'd need to buy the property for to get that yield, he explains.
And while 99 per cent say no, distressed vendors are taking low prices. Church says less-experienced investors should go through investor groups and check Trade Me and newspaper ads.
He is also using mortgage transference, which he says is largely untested in New Zealand. Instead of raising a 20 per cent deposit, the investor takes over the existing mortgage from a distressed homeowner.
"It makes the purchaser the white knight," says Church. Until now, banks in New Zealand have not encouraged this technique, but Church says he is negotiating a deal like this at present.
"From the bank's point of view, it's a win because it retains the loan."
Vendor finance is another increasingly popular approach since banks began requiring a 20 per cent deposit on property purchases.
In a typical deal, the vendor leaves 20 per cent equity in the property - usually five years interest-free. This lets the buyer offer a better price than a straight deal - but offset settlement of part of the purchase until the market improves.
Church recommends areas which have always done well for investors in the past, such as Mt Wellington, Ellerslie, Onehunga and Mt Albert in Auckland.
Property Investors Federation president Martin Evans predicts more opportunities for new property investors this year.
"It's a good time to invest; all the factors are there - interest rates have come back 5 per cent, property prices are dropping and are expected to drop even more," he says.
Many people who are renting out properties "can't see any light at the end of the tunnel", and will be putting them back on the market, he predicts.
Mum and dad investors won't have much competition, with first home buyers needing 20 per cent deposits and existing investors often over-leveraged, he says.
Catalyst2, property specialists who help inexperienced investors, maintain it is difficult to find a quality property that is positive cashflow.
Principal Tanya Kwasza says if you find one, there is usually a compromise; for instance it's in a bad location, needs a lot of maintenance, or is on an inferior title. Thus future capital gain may be minimal.
But she says property investment fundamentals are aligning - rents will increase, values are falling and interest rates are low.
People preparing for retirement have to do something more creative than just keep their money in the bank, says Kwasza.
"If you have a $150,000 income at 55, how can you save $1 or $2 million? If you want 5 per cent return to live off, and to pay off your mortgage, you have got to take some action," she says.
Over time, rent returns outpace interest on bank deposits, so property makes a better investment.
She recommends a new or near-new property in a good location and ideally with a guaranteed rental through Housing New Zealand. Even though it will not be positive cashflow, you have a better grade of investment property without the dramas that undesirable tenants bring and increased expenditure on maintenance and repairs.
Catalyst2 co-principal Peter Turner recommends areas with major infrastructure, such as South Auckland, Flatbush, Alfriston and Papatoetoe.
Meanwhile, property finders are flat-tack at present as inexperienced investors seek help finding the right property. Polaris Group director Kent Leicester has taken on two new property finders in the past week to keep up with demand.
"More people are getting into the market. We have noticed huge activity in the past six weeks. Most of our clients are looking for positive cashflow property," he says.
And with interest rates halving in the past 12 months, it is possible to find 7 or 8 per cent yielding properties in Auckland. "The rental market is still sound. Most positive cashflow deals with equity in them are coming from South Auckland."
Many investors' biggest asset is their own home, and they have realised that now is a good time to get into the market.
Sourcing property below valuation gives finders such as Leicester the cut he needs to make it worthwhile. "We are probably coming across at least one a week," he says.
Leicester is finding vendors open to new ideas, including mortgage transfers and vendor financing. Mum and dad investors with secure, salaried jobs and equity in their homes are best-positioned to buy, he says.
"If they are buying a property where the rent covers outgoings, the banks are happy," he says. "We tell clients to buy on the numbers, not on emotion. "
Leicester found a six-bedroom home in Manurewa with a registered valuation of $326,000 for $268,000. Rented at $480 a week, it gave his client a 9.3 per cent yield.
Mortgage brokers are dealing with buyers and sellers at present and are seeing plenty of deals.
"I have 12 property investors, all with $3 million of property," says John Bolton, principal of Squirrel Financial Solutions. And plenty of them are getting 9 and 10 per cent yields, he says.
Outside the property market, ANZ chief economist Cameron Bagrie warns against Kiwis investing in property so early in a bear market.
"I think it's overlooking some very big issues - the whole world shock is about the fact there is too much leveraging."
Bagrie says the concern now is about paying down debt, not taking it on.
As property is still expensive - seven times a person's average wage - property investment does not "pass the smell test", he says. "Time is well and truly on our side."