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The Rise, Fall and Rise of Property Syndicates

property-syndicatesThe Rise, Fall and Rise of Property Syndicates

Falling interest rates are prompting investors to look elsewhere for returns, and, with the uncertainties of the share market, property is where they are looking. However, the rush for residential investment property has pushed prices through the roof. Commercial and industrial property is out of reach for the average investor and so property syndicates are back in favour again.

Markets go in cycles and about twenty years ago we saw the same trend. Interest rates had fallen, along with inflation, and people, particularly retirees, were looking for higher income returns. Companies like Waltus, Dominion Properties and St Laurence flourished. Opportunities to buy into property syndicates were quickly snapped up. While the property market was buoyant, investors were happy. It wasn’t too long before the risks became obvious. Some syndicates performed better than others. Investors who wanted to cash up their investments, particularly the non-performing ones, found it increasingly harder to find other investors to sell to. It was unclear when the syndicates would be wound up and the funds returned to investors. Eventually, providers were forced to roll the syndicates into one fund which meant that in effect, investors in high performing properties received a lower return so those in low performing properties could receive a higher return.

Investing in a property syndicate is akin to putting all your eggs in one basket. Liquidity is poor and promised returns may not eventuate if the tenants default or the building requires extensive refurbishment. Syndicates are a more expensive way to own property than owning it directly as the syndicate manager charges a fee. Alternative options for investing in commercial and industrial property are to invest in a listed property trust, or a property managed fund. While there are still management fees to be paid, they offer much greater diversification and liquidity

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Property Investment Basics

property-investment-basicsProperty Investment Basics

Low interest rates and rapidly rising property prices are driving investors to property investment. Many would-be property investors don’t understand the complexities involved and can easily make costly mistakes. Here are some basic principles to follow.

Understand that property investing is a business. It requires planning, discipline, a wide range of knowledge, willingness to take calculated risks, and a focus on getting a good return on your investment. There is no room for emotion in property investment.

Develop your strategy. There are many different approaches to property investment with different financial outcomes. You might choose to:

  • Buy property to retain for the long term, buy to renovate and sell, buy to renovate and retain, or be a property developer.
  • Specialise in certain types of property, such as apartments, properties with multiple tenancies, coastal properties, or low cost housing.
  • Specialise in a particular geographic area.

Different strategies have different implications for taxation and cash flow.

Get help from a team of experts. As with any other business, you will need an accountant and a lawyer. It also helps to have good relationships with real estate agents, mortgage brokers, insurance brokers, property managers, property inspectors and tradespeople.

Learn as much as you can before you invest. Read property magazines, learn from other investors and research the areas you are interested in. Practice doing financial analysis on properties for sale so you get a feel for the kind of property that makes a good investment.

Investing is a great way to build wealth because of the principle of leverage – that is, borrowing money to invest. Leverage multiplies the returns you receive on your investment. Get it right and you could well make a fortune. Get it wrong, and you could lose a fortune. There’s a good incentive to stick to the basic principles.

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Avoid Costly Property Investment Mistakes

MistakeAvoid Costly Property Investment Mistakes

The property market is on fire. The high rate of increase in property prices makes property an attractive investment option in the light of low bank term deposit rates and the current volatility of the share market. Investors are using the increased value of property they already own as security to borrow more at historically low interest rates. Of course there is a snowball effect at work here. The higher the returns, the more people flock to invest in property, and so prices go even higher. Within all this frenzy, there are people making terrible investment mistakes. The problem is, the mistakes will only become evident when the property market cools, which it will inevitably do.

Investing in property requires a number of different skill sets and thorough research. Understanding the financial aspects, including tax implications, is critical. Returns from property come from both capital gain and net income. The trick is to find a property that will provide capital gain as well as sufficient rental income to cover borrowing costs, rates, insurance, property management fees and maintenance. Some properties are great investments; some are not. Successful investors know how to spot the good ones. When the market is going mad, it is easy to make rash decisions which will prove costly later.

If you are planning on investing in property, read as much as you can on the subject. Join your local Property Investors’ Association, attend meetings and get to know other investors. Find out who you can go to for expert advice on the financial, tax and legal aspects of investing. Select a geographic area to focus on based on future expected demand. Before you buy, do your calculations on price, rental income and expenses, including any renovation costs, so you know what the financial implications will be.

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Property Investment Update

PropertyProperty Investment Update

Property investment is on the boil again thanks to low interest rates and rising property values. Underlying the price rises are high levels of net migration, low levels of new building and growing numbers of first home buyers tapping into KiwiSaver balances for their deposit. Auckland-based investors are taking advantage of the increased equity in their homes to buy properties in the Upper North Island, particularly in the Waikato and Bay of Plenty. Wellington, which has seen little change in property values since the Global Financial Crisis, is suddenly surging ahead and other areas are seeing growth too. From an investment point of view, property is looking good in comparison with other alternatives. The returns on fixed interest investments such as term deposits and bonds are the lowest they have been for decades and there is no sign that this will change any time soon. Worries about the Chinese economy continue to cause volatility in share markets around the world. On the other hand, property prices across the country increased by over 11% in the year to February according to Quotable Value statistics.

While property investment is looking increasingly attractive, it is not a game for novices. There are significant risks involved. Successful property investment requires research to identify the right location and specific property, a good understanding of the financial aspects including how to get a good return, the ability to negotiate a good purchase price and borrowing terms, knowledge of tenancy law and a whole host of other things. Basic concepts like being able to calculate the gross and net income yield on a rental property are essential to understand before making an investment. In a rising market, any fool can make money, but markets eventually turn and that is when the soundness of investment decisions is revealed.

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Property Investment Opportunities

HouseProperty Investment Opportunities

It would seem the Auckland property market is reaching a plateau. Price increases in the Auckland market have been underpinned by a shortage of properties, high net migration and high investor activity. New conditions to be imposed by the Reserve Bank on 1 November, 2015, including a 30% deposit requirement for Auckland house purchases, alongside an easing of restrictions outside Auckland on purchases with less than a 20% deposit, may well see investors looking elsewhere. In the medium term, the increased rate of building in Auckland combined with an expected fall in net migration could well see the end of the property shortage and reduced pressure on prices. Huge increases in property prices (24% in the last year) in Auckland have not yet been matched by equivalent increases in rent, which means the gross income yield (annual rent divided by property value) on Auckland properties is particularly low, being well under 5%. Without capital gain, there will not be much in it for investors.

Meanwhile, the rest of country has been lagging behind Auckland and has some catching up to do. As investors abandon Auckland, there could well be opportunities for capital gain in other areas resulting from increased investor attention. There are several areas around the country where gross income yields are in excess of 6%, which compares favourably with mortgage interest rates as low as 4.35%. Further details of income yields nationally by region can be found here.

The spill over from Auckland will not only be investors but also people looking to cash in at the top of the market and move elsewhere, first home buyers who have been squeezed out by the higher deposit requirements, and renters who face rising rents. Those investors who get in early in areas outside Auckland could make good returns.

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Your Home as an Investment

CastleYour Home as an Investment

New Zealand has one of the highest rates of home ownership with over 60% of households being owner-occupiers. The millions of dollars spent each year on DIY projects is evidence of the pride we take in our homes and also of the belief most Kiwis have that their home is an investment which can sold later in life to help fund retirement. The high rate of ownership is, however, declining with the rapid rise in property prices and more transient lifestyles. Generations X and Y, who are more concerned with freedom than security, are more likely to want to rent than their baby boomer parents. Most wealth creation experts agree that property is a good investment. Many also argue, however, that the home you live in is not strictly speaking an investment. While your home will increase in value over the long term, the money you have invested in your home can often produce a better return if it is invested elsewhere. For example, if you owned a home that could be sold for $600,000, you could potentially get a better return on your money by buying two houses or a house and flat with the same total value, one of which you live in and one of which you rent. Of course, if you took this approach to the extreme your best strategy would be to live in cheap accommodation which would lower your standard of living. Bear in mind that in general, the more money you have invested in the home you live in so as to enjoy a good lifestyle, the less wealth you will create for later enjoyment. Property ownership helps create wealth and security in the long term, but get the right balance between living comfortably now and creating wealth for the future through investment.

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Property Investment for Newbies

PropertyinvestmentProperty Investment for Newbies

Property investment is a popular way to create wealth, but many would-be property investors don’t understand the complexities of property investment or where to begin. It is essential to know how to maximize the return and minimize the risks. Here are the essential tips for first time property investors:

Understand that property investing is a business. It requires planning, discipline, a wide range of knowledge, willingness to take calculated risks, and a focus on getting a good return on your investment.

Develop your strategy. There are many different approaches to property investment with different financial outcomes. You might choose to:

  • Buy property to retain for the long term, buy to renovate and sell, buy to renovate and retain, or be a property developer.
  • Specialise in certain types of property, such as apartments, properties with multiple tenancies, coastal properties, or low cost housing.
  • Specialise in a particular geographic area.
  • Buy properties with a high income return or properties with a high expected capital gain.

Get expert help. As with any other business, you will need an accountant and a lawyer. It also helps to have good relationships with real estate agents, mortgage brokers, insurance brokers, property managers, property inspectors and tradespeople.

Learn as much as you can before you invest. Read property magazines, learn from other investors and research the areas you are interested in. Understanding how to estimate potential financial returns is vital.

Determine your borrowing capacity. Work with a lender to establish a level of borrowing you can sustain while still leaving some ‘wriggle room’ in case things don’t go according to plan.

Know what you are buying. Before you buy, calculate the potential return from a property and ensure you are aware of any structural, maintenance, legal or permitting issues relating to the property.

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Why Retirees Shouldn’t Invest in Property

Property investmentWhy Retirees Shouldn’t Invest in Property

Investing in property is a popular means of building wealth for retirement. Typically, keen property investors will build a portfolio of properties using borrowed funds in the expectation that the increase in value of the properties over time will allow them to sell off one or two at retirement leaving a portfolio of properties with no debt. The rental income from the properties, less expenses such as rates, insurance and maintenance, then produces an income for retirement.

While this all sounds good in theory, there are a number of factors which make property a less than ideal source of retirement income.

Many people live for twenty or even thirty years in retirement. Investment property held over that period of time usually requires expensive maintenance such as painting, roof repairs and replacement of floor coverings. Financial pressure can result unless provision has been made for these expenses. Income from property is not constant, as there are often periods between tenants when the property is vacant and occasionally tenants do not pay or cause damage to the property. Being a landlord, even if you hire a property manager, is not fun if you are in poor health or in your late retirement. As well as the hassles of dealing with tenants and maintenance, there is also the need to keep records of all income and expenses and to prepare an annual tax return.

Perhaps the most compelling disadvantage of investing in property in retirement is that although it produces an income, it is difficult to access your retirement capital. Unless you have a desire to leave a large inheritance for the beneficiaries of your estate, it may be better to sell your property and invest in liquid assets that can be gradually spent for your enjoyment over the course of your retirement.

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The Property Comeback

The Property Comeback

Property statistics are clearly showing the start of next property cycle, with particular hot spots in Auckland and Christchurch. This is prompting investors who have been sitting on the sidelines to dust off their calculators and take a good look at the opportunities in the market. Low interest rates are one of the driving forces, along with net migration, the Christchurch rebuild, and the lack of property stock due to low levels of construction activity. The danger is that novice investors, caught up in the frenzy of an up-cycle, will make poor investment decisions.

 Success in property investment comes from in-depth research and an understanding of what makes a good investment. The knowledge required takes time to acquire. Most seasoned investors will tell you they are still learning! If you are keen to have a go at property investing, here are some basic guidelines:

  • Read several good books on property investment
  • Attend property investment seminars
  • Join your local branch of the New Zealand Property Investors’ Federation
  • Talk to experienced property investors
  • Do your research to determine the best geographic area to buy in, based on population growth, economic growth, trends in property prices and rents, etc
  • Narrow down your choice to specific suburbs, based on demand for rental properties, proximity to conveniences such as transport, shops, schools etc
  • Decide what kind of property you want to buy – bungalow, apartment, unit, home and income etc
  • Research specific properties based on the rental yield (annual rent divided by purchase price), projected capital gain, projected cash flow (including repairs and maintenance) and opportunities to increase the value by undertaking improvements.

In the current low interest rate environment, property investment with a combination of rental income and capital gain is looking increasingly attractive.

 

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Is Property Still a Good Investment?

Property Investment

Tax changes for investment property came into force on 1 April this year, forcing many existing investors to review the ownership structures for their investments and the viability of retaining their properties. In a nutshell, the effect of the changes is that investors will no longer be able to claim depreciation on their buildings, and fewer investors will be able to claim losses against personal income. The backdrop to these changes is a depressed property market with little prospect of significant increases in property prices for some time to come. The question many are now asking is whether investing in property is still a good idea.

One of the most prevalent mistakes made by investors in all types of investment assets is to base investment decisions on tax benefits. As they say, ‘there are only two certainties in life: death and taxes’. To that should be added a third certainty, and that is, ‘tax rules change’. Sound investments are those that stack up in their own right, rather than because they have tax benefits. Many investors made the mistake of purchasing properties in the expectation that future capital gain would offset losses and that the tax benefits would help their cash flow in the short term. This was not a sound long term strategy. The impact of the new legislation is that those investments which were soundly based will continue to be so, and those which relied on the benefits of tax losses are unlikely to stack up.

Investors without good cash flow will no doubt sell off properties over the next two years. The result is likely to be higher rents, fewer investors (but with deeper pockets) and more soundly based investment portfolios. In the long term, the increased stability will be a good thing for both landlords and tenants.

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