Buying as an investment

If you already own a home and are looking to purchase property for investment reasons, or you want to park your money into property as an investment, your reason for buying property is obviously different. Some things you should consider:

1. Properties will require more of your time to manage and is an active investment, compared to say a term deposit where you can "set and forget" - are you ready for this increased time commitment?

2. There are strict regulations around tenancies and houses in general, it's more akin to a small business than a passive investment - are you aware of this?

3. All investments carry risk - ensure you are comfortable with this.

The return on investment - cashflow

It is my opinion (and mine only) that properties for investment purposes do not work out for my circumstance. For example, let's take a property in Blockhouse Bay, Auckland, valued at $1,000,000 and a rental appraisal of $800. I am being generous both in terms of a low valuation and high rental:

Description	Amount (Annual)	Explanation
Rent	$41,600	Fully occupied year-round in perpetuity
Rates	-$3,300	Approximate rateable valuation for a $1M property
Insurance	-$1,500	Approx. landlord insurance
Maintenance and Fund	-$2,000	Allocating budget for short and long term maintenance (e.g. painting, roof, etc)
Income from property	$34,800	Rent - Property Expenses

So you have your property rented for $41,600, and less rates, insurance and maintenance, you will have about $34,800 left over. Some big assumptions are being made around the property always being fully let. I am also NOT including the cost of a property manager which is about 7% of your rent, on the basis you've got good tenants and a solid property. I am including a 2k maintenance fund, which is about 20K over 10 years, to account for painting weatherboard every 10 years, carpets, etc.

We then need to account for the financing costs. Even if you are buying with cash outright - there is an opportunity cost, but lets assume a 20% LVR, you will be borrowing $800,000 from the bank, and providing a deposit of $200,000. Because this is an investment property, you need to consider the opportunity cost of losing interest on your deposit AND the principal repayments made during the mortgage period, even if it is a different rate to the borrowing interest rate. Let's go through that:

Description	Interest (Annual)	Explanation
800K @ 6.5% borrowed	$52,000	Interest on borrowed amount
200K @ 6% invested	$12,000	Lost interest to withdraw from a term investment
Total financing costs	$64,000

Based on the above, you will spend $64,000 in interest alone during the first year, either paying interest on mortgage, or losing out on having the money invested somewhere else. To break even on financing costs, the blended interest rate would have to be 3.48% and stay there.

There is an element here of rising rents, but do consider rising expenses and the overall rental market as well, rent is determined based on the market, not on your own costs.

In summary, reviewing the income and expenses above, you would be making a yearly loss on your investment property almost in perpetuity unless interest rates were at or below 3.48% - which I think is a pretty bold bet.

Buying for capital gain

If investment property doesn't work out for cashflow, what about capital gain? Many Aucklanders have made a lot of money on capital gains over several decades. It's fact across almost every property ever owned in Auckland. If you are going down this pathway, understand the risk of your investment, and remember the speculation involved.