“I should invest in property.” – Thought I had one day last year.
Property is such an attractive prospect. With a good property manager its largely passive, there are sweet sweet capital gains and I could see in the future having a few properties could be a great way to provide steady income in retirement. I don’t know about anyone else but I really really struggled to find a property with decent rental returns. New Zealand houses are really expensive and sometimes not great quality. I couldn’t afford anything in my home town (Current average house price – $931,061!) so I had to look in some of the smaller regional towns nearby, I started with Hamilton but the houses I could afford there tended to attract tenants that looked like hard work. After spending many weekends looking at dismal homes I gave up on Hamilton and started looking further afield.
I finally ended up looking in Tauranga (a coastal town with a large port about 3 hours away) and I found a large 2 bedroom home, with a really light and bright living space. It had a lovely feel to it and if I were to one day fully renovate it the results would be a very classy living space. Even in its current condition it was very liveable.
I didn’t have a deposit
Yup, I bought the property with no deposit. I own my home here in Auckland (well a large % of it) so the bank was willing to lend me 100% of the purchase price of this property.
The thing with houses is that the purchase price is just the beginning of all the things you are going to have to pay for. Although I did talk the sellers down from a list price of $235,000 I ended up paying pretty close to that figure by the time the purchase was done and the house was ready to rent out.
Purchase price $224,000
Pre Purchase Building Inspection $517.5
Drain Inspection $230
Drain rehab and repair $3624.1
Insulation and ventilation $2949.61
Total purchase costs $232,221.21
As you can see it cost me another $8,221.21 to get the property ready to rent out. I wasn’t to upset about the prospect of getting these repairs done as I felt I was still getting the property for a good price. The drains were completely clogged and causing dampness around the property but they are fully functional now. I also paid to have a high standard of insulation and ventilation installed. New Zealand properties are notoriously cold due to poor insulation and are often prone to mould issues as tenants trying to keep heat in will not open windows in winter. All the moisture from regular household activities can create an environment that encourages mould growth on ceilings and soft furnishings. It was really important to me that any home I rent out is warm and dry.
And how about those ongoing costs…..
Well lets start with a happier note. The place is currently rented out for $340 a week and they’ve paid on time, every time. Gotta love that.
Annual Rent $17,680
Mortgage (principal and interest) $14,736
Rates (property tax) $1,845.90
Property management $1,016.6
Shortfall of -$1,054.5
So this is why it sucks
I have to pay out $20.27 a week to keep the place going. I also will have to pay out of my own pocket for any unexpected repairs and regular maintenance. It’s a negatively geared property. Its quite common in New Zealand to invest in property this way, however I would prefer to making money! I can offset the losses against my income so I end up paying less income tax, which is nice.
There is some good news!
After one year the mortgage is down to $218,574 and the rateable valuation on the property is $256,000 giving me equity of $37,426! So you could look at it as spending $20.27 a week to acquire $37,426 which I’m sure you would agree is a bargain! Its been a great boost to the net worth. I was extremely lucky to buy when I did. The market in Auckland had become ridiculously expensive and a lot of young families were looking to move to more affordable towns. The market in Tauranga was only just starting to heat up and I’m sure I got an absolute bargain. You can’t find much for under $300,000 in Tauranga now.
Am I going to keep this money pit of a property?
YES! For now I’m going to hold, I have the opportunity to refinance in February 2017 and I should be able to reduce the mortgage payments. The Tauranga property market is booming and the current valuation of $256,000 is a very conservative number generated by the council when they are determining property rates. If I were to get a proper market appraisal I believe the value would be a lot higher. There’s no tax on capital gains in New Zealand so I get to keep all of the profit.
There’s always the possibility of increasing the rent, my property manager keeps on top of the market and will assess if any increases are justified. I plan on having the property at least cashflow neutral by March 2017. For now I’ll continue to pay my $20.27, which to me seems a small price to pay for owning this assets which keeps on increasing in value.
Actually its not as much of a money pit compared to last year
I did two things this month to improve the returns, I re-evaluated the insurance and discovered I was really over insured and paying too much. I got this bill reduced by $200. I also switched property managers, my first manager was useless and expensive. I finally got fed up and found a company recommended by the property investors association. The price is excellent and he’s a great communicator (which is exactly what you need for an out of town rental). I was inspired to see what savings I could make after reading a post over at Afford Anything about the incredible power of the 1% margin for improvement. The idea that loads of small improvements can make a big difference was so obvious and I felt like an idiot for not optimising my expenses sooner. Yes property can be passive but for the best returns its helpful to keep a watchful eye on things!
Values in Tauranga have skyrocketed in the last 6 months. My modest property purchased for $224,000 ($216,000 mortgage) in 2015 is now worth $340,000-$370,000. The rent has been the same but my tenants are moving out in a month and my property manager has advised that he can increase the rent. Interest rates are dropping and the reserve bank has signalled one more rate drop before the end of the year. My fixed term mortgage ends in April 2017 so hopefully I’ll be able to take advantage of a much lower interest rate. With the increased rent and lowered interest rates this property should be making a profit next year woohoo!