Avoiding Costly Property Investment Mistakes

We all know that the property markets throughout New Zealand’s major cities appear to be overheated. House prices have increased at rates numerous times faster than the inflation rate. Great for property owners, but a nightmare for those buying their first homes.

There has been a swing away from Auction to sale by fixed date. This effectively creates a tender type process. It also offers buyers better consumer protection.

Investors tend to use the increased value of property they already own as security to borrow more at historically low interest rates. It is all too easy in a hyped-up property market to make terrible investment mistakes. The problem is, the mistakes will only become evident when the property market cools, which it will inevitably do.

If buying an investment property, the economics of the deal need to be a key driver. If the economics don’t stack up, then it should be a simple decision to not buy and move onto another potential property.

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.

Investing in property requires a number of different skill sets and thorough research. Understanding the financial aspects, including tax implications, is critical. The bright line test has now been extended to five years. Previously it was only two years for properties sold with a sales and purchase agreement after 28 March 2018.

Returns from property come from both capital gain and net income. There is also a fundamental question that you should ask yourself. Do you really want to be a landlord and subject yourself to all the stress and worry of dealing with tenants?

The key 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. It can be far too easy to underestimate these costs. Occupancy rates can also be seriously underestimated.

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. Above all, err on the side of caution, as the wrong buy decision could prove to be a very costly mistake, both financially and emotionally.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice