Property investment

10 Reasons to Buy your First Investment Property

One. 2009 is a good time to buy for a cashed buyer – It’s 2009 and there is a global recession, there is no shortage of foreclosures, or mortgagee sales. Get hunting for bargains. As fewer people can afford to buy, as times are hard, there are more people looking to rent, which drives up rent.

Two. You can share the risk, and cost – You can make fairly small investments if you share with others, however your return will still be equal to your percentage of ownership, and the overall gain in value of the property.

Three. You are in control – The performance of any investment is not guaranteed, however, a bricks and mortar investment may provide you greater control than other assets.

Four. Capital growth – Investing your money in the bank will not make you any capital growth. It may hold it’s value and be safe, however when you take inflation into consideration, you stand to gain very little. However, with property investment, the value of your property will almost certainly increase over time. This capital growth becomes your profit.

Five. Taxation benefits – There are many tax benefits in owning property, and in some countries more than others. Benefits come in the form of claiming against depreciating buildings, or negative gearing your investment to claim back tax on other income.

Six. Property makes millionaires – More millionaires have been created through property than any other form of investment. Property millionaires’ have been created at a rate of more than 58,000 a year since 2001. By 2010, there will be around three quarter of a million millionaires through rises in property prices.

Seven – Anyone can do it – You don’t require any degree or training, however, I suggest doing a fair bit of reading and seeking advice.

Eight. Property Investments provide Security, Houses don’t go broke – You can still loose money in a property investment, particularly if you have a rental void, or if you have to make a short sale. However, when compared to the stock market, where you are investing companies, property seems secure.

Nine. You can buy it with someone else’s money – Property investment gives you the ability to leverage other people money, and profit from it. Sure the bank will charge to a nice interest rate to lend you money, however the best part is the banks don’t share in the capital growth of the property, this increased equity will be all yours.

Ten. You can add value – You can add value to your investment by renovating or refurbishing your properties. Ensure that you are not over investing in the wrong property though, some areas and markets have a ceiling price.

It’s a great time to invest in property if you have the money, just make sure you seek professional advice, and do some reading.

Property Investment Leverage

The key concept in property investment is leverage. If you have experience in the industry you may already understand this concept, but for the benefit of those who are new, I will explain it. Leverage is your ability to increase your returns by using other peoples’ money to increase the overall value of your investment. With property investment it’s usually the bank’s money.

It makes more sense if you look at some numbers

Say you have $30,000 to invest. This would need to be a lump sum to invest in the first two options, however for option 3 it could be equity from your main residential property which you live in. Lets look at the best way to invest this money?

Option 1) Place your money into a term investment or savings account with your bank

We would be looking at about 3-4% return. After you consider tax on profit, and inflation you are going make very little progress at all. Although, your money will be very safe.

Option 2) Stock Market and Shares

Unlike with the bank, your money would be considered not as safe invested in stocks. However, a lot of that depends on the risk of the stocks you buy.

This table shows how much money you would make if your stock gained 8% annually for 10 years. 8% may be a fairly conservative profit from playing the stock market, however, if you wanted to play safe, I think it is a good index to use.

Year	Total Value	Annual Profit
1	$30,000.00	$2,400.00
2	$32,400.00	$2,592.00
3	$34,992.00	$2,799.36
4	$37,791.36	$3,023.31
5	$40,814.67	$3,265.17
6	$44,079.84	$3,526.39
7	$47,606.23	$3,808.50
8	$51,414.73	$4,113.18
9	$55,527.91	$4,442.23
10	$59,970.14	$4,797.61

Doubling  your money playing the stock market over 10 years is a good investment, however this projection takes into account an 8% annual gain, and assumes you have invested wisely. There are other variables which haven’t been considered.

The numbers for property investment look even better.

Option 3) Property Investment

The best thing about property investment is it enables you to leverage the $30,000 to purchase a property of $100,000 – $200,000, depending on how much deposit is required.  Your investment will grow as a percentage of the value of the whole property, not just the amount you have invested.

Year	Total Value
1	$200,000.00
2	$212,000.00
3	$228,960.00
4	$247,276.80
5	$267,058.94
6	$288,423.66
7	$311,497.55
8	$336,417.36
9	$363,330.74
10	$392,397.20

Looking at a conservation rate of growth for the property market of 6%, the overall value of your property would double in 10 years, however, rather than the investment of $30,000 doubling, the whole investment has doubled. Even if you only had only paid off interest, and no principle, and you still owe the bank $170,000, your $30,000 has turned into $222,397.20 of equity in the property.

So as I am sure you have guessed the $222,000 is much better than the $60,000 from the stock market!

Property investment – How much risk are you willing to take?

Property is like any form of investment, where the greater the risk you take the more potential you have to make greater profit. Ultimately how much risk you take my depend on where the money you invest has come from, and to what degree of trouble you would be in if you were to lose it!

What time scale are you working on?

The time scale you are working on will affect the level of risk you may need to take to see a positive return. Where there are many safe investments that will make a nice return over a period of 5 to 10 years, there are very few that are risk free for a period shorter than 12 months. It is my opinion that property investment should be seen as a long term strategy for profit.

Spreading Risk

One way to reduce the risk involved in an investment is to spread that risk across several different projects. If you are lacking in capital, then one way to spread risk would be to invest with a partner, family or friends. Putting all your eggs in one basket is not the best strategy for every beginner. Raising the capital required to invest in property will be a key factor.

Capital

Capital is the money that you have to invest. Capital may come in the form of equity you have in other investments, or the property you live in. The amount of capital you have will turn into the deposit you have to place down on your new investment property after expenses.

Market cycles – How to avoid greater risk

The property market works in cycles, both locally, and as a whole. In times of recession people have less money to spend, more people need to sell their homes, and as a result properties sell for less. If you are a cashed up buyer with capital this is an ideal time to invest in property, and there are plenty of bargains to be found. However, it is also much harder to borrow cash during a time of recession, with banks feeling to pinch of lower interest rates, borrowers are often expected to find a much higher deposit.

Investment Property Checklist

As part of any smart property investment, a good idea is to develop your own Investment Property Checklist. There is a lot to consider when investing in a new property, and it goes without saying that it is likely that you will be dealing in large amounts of money. So why not do yourself a favor, and build your own Investment Property Checklist. I have put together some thoughts below, however, it is important to make a list that suits your goals, and plans. What is key for me, may not be a consideration for you.

1)      Do the sums, and if they don’t work out walk away. Always buy within your means.

2)      Check the property, and inspect for defects, if there is anything that concerns you, pay for a building report. It is better to waste a few hundred now, than to throw away your investment on a leaking building. At the very least you can use any problems with the property to help talk down the price, if you don’t have this information, you may end up over paying.

3)      Get a pre approval from your bank or money lender before you commit to any deposit. This sounds like a no brainer, but bidding on an auction or making a commitment to buy, then finding out you don’t have approval from your bank will cost you.

Mortgage checklist

1)      Loan duration – What is the duration of the loan – make sure you are comparing peas with peas and carrots with carrots when you are looking at different options.

2)      What is the interest rate? Is it competitive? Do some research. Just because someone is willing to give you money, it doesn’t make it the best deal in the world. Compare.

3)      Is the interest rate fixed or floating – If you have a fixed income, then fixing your loan can provide reassurance that you will always be able to afford repayments. Floating my be a better option in times of recession, when interest rates are low and banks won’t commit to a lower long term fixed rate.

4)      Are there any extras included in the package. Typical freebies might include covering lawyer costs, or covering certain insurance costs for a fixed period of time. It is worth knowing all the details of your package.

How to spot Market Crashes

Investment during a time of heavy growth is not normally a good investment. It is hard to know when things will level out, or if the floor will fall out of the market. Booms are a bad time to get in for most property investments, recession is a good time to get in. If the regular Joe on the street is talking about how hard it is to afford a house, then chances are things are heading for a crash. Talk to someone in a solid profession like teaching, if this person thinks housing is too expensive, then housing prices are reaching beyond regular people. Something has to give, and it could be housing prices.

New Zealand Investment Property

New Zealand is a lovely place, it has a fresh green image, and despite it’s relatively remote location it still does very well on a global tourism market. However, what are the benefits of investing in New Zealand property, and if I am a foreigner, is it worth my time.

Positives

New Zealand does not have a capital gains tax, so when you sell your investment, you get to keep all of the profit.

New Zealand has a deprecation value of 4 percent per annum. This is a much higher rate when compared with Australia for example, which has a deprecation value of 2.5 percent. This means investors can claim a larger amount of a properties depreciation earlier on in the investment, which makes an investment more profitable earlier on.

Negatives

You will likely find it very hard to get finance from New Zealand banks as an international investor, so you will need to source money from else where.

As with any foreign investment property, you will need to hire a trustworthy property manager. If you can not be there to make decisions, you need someone there to manage the daily running of your property.

Repairs and Maintenance – New Zealand has a lot of older homes, when purchasing you need to consider any running repairs and maintenance that may be involved in the property.

Commercial v Residential

Statistics from 2007 show that rental office space in the 3 main CBD’s had grown an average of 6.4% in the 3 years proceeding with Wellington showing the highest rate of growth. This suggests that at least in a time of growth New Zealand commercial property investment is solid. Looking at residential property investment in New Zealand, the main cities are key areas of demand, as well as life style regions including Nelson, Gisborne, Coastal Northland, and areas around the lakes in the central Otago.

Research

As with any investment, and in particular in foreign investment you need to thoroughly research your purchase. This means getting your ear close to the ground in the New Zealand property market. The best sites to do this are realestate.co.nz, allrealestate.co.nz and trademe.co.nz. I think it goes without saying, but if you are considering buying a New Zealand investment property you need to seek professional advice.

Choosing Property Investment Locations

Location Location location

When investing in property location is one of your key factors to consider. Researching your location, and ensuring you are making a good purchasing decision can be the difference between purchasing a great investment, or ending up with a lemon. So when looking at locations what are the main considerations:

Rental Potential

The rental potential of a property is always going to add to the value. A house may be run down, and lack any street appeal, but if it is in an area of high rental demand, there is a good chance that it will still be a sound investment. Areas that typically have high rental demand would include places close to tertiary institutes and universities, students may not make the best tenants, but there is never a shortage in demand. Any where close to large employers. Hospitals are a good example. Places of convince, close to CBD’s or to key services such as public transport. Ask your self the question: “Who would live here?”

Desirable Locations

Certain locations are always going to be desirable. Beach front property, or property with an outstanding view, areas in big city CBD’s. Places like this sell at a premium, but they also hold their value, and if the market moves up, so does the value of your investment.

Emerging Suburbs

If there is investment going into other properties, or public amenities in an area, it is a good sign of growth in that area. If property developer has decided to build a new apartment block there, it is a good sign that there is demand. Keep you ears close to the ground and look for emerging areas of town.

Historical Areas of Capital Growth

Depending on where you live you may be able to get access to sales figures of areas around town. Look for areas that show a pattern of historical growth. Which suburbs have always been a good place to buy, chances are they will continue to be a good investment.

Know / find someone who lives in the area

You can normally get a good idea on an area by talking to someone that loves there. Are they happy, or are they always talking about wanting to move. If people don’t like living in an area it’s not likely to be a good investment.

Right place on the right street

Even having selected a good suburb to buy in isn’t the whole decision, you need to buy the right house on the right street. You might have heard the saying “buy the worst house on the best street.” If you are not planning on spending money on the property this may not hold true.

What to avoid – In general tenets dislike living close to:

• busy roads
• train lines
• airports
• next to schools
• industrial parks
• large powerlines or cell phone towers
• public toilets
• places that have large buildings blocking any view
• under common flight paths
• large venues where there will be late night sports or concerts