Shoulda, Woulda, Coulda Been a Property Investor...
If you would prefer to listen to me read this blog post, please click on the play button.
When we moved away from Wellington fifteen years or so ago our landlord at the time said “BUY property, BUY anything you can get your hands on, houses have never been so cheap and they are about to go UP in price”. He already had a number of rentals, was busy buying more and his wife was a real estate agent so he was first in line for the best deals. I did not doubt he was correct.
We moved to Christchurch and bought our first house. Although the conversation with him really struck a chord with me, we only bought one house. And sure enough about a year later things started to move up in price. By the time we left Christchurch after the earthquakes our house had more than doubled in price, my old landlord was so right! However, after dealing with insurance nightmares with one property I was actually thankful we did not own more.
We had several friends who had either one or a number of rentals and I always listened with interest when they told me about them. Some just collected the rent, paid the mortgage and it was all good and others told me the horror stories that we hear all too often (house trashed, tenants heating the home with the oven (true story), rent not paid etc). Because we had a mortgage at the time and were in contact with our bank I recall them offering us hundreds of thousands of dollars to have ‘on standby’ if we “happened” to be out in the weekend and fell in love with another property which we could purchase and rent out. We certainly went shopping in the weekend but the urge to buy another house never overcame us.
But being in the rental game continues to be a revolving conversation in my head.
Should we do it if everyone else says it is such a good idea?
What are we missing out on? Big time FOMA going on right now!
Is it already too late, prices have surged already dang it.
Our first house doubled in price, chances are it might/will happen again.
Could I be retired by a pool somewhere while the money drips steadily into the bank account from all my rental properties?
But until recently I just could not justify the expenditure to make it all work and I seem to be able to easily find a lot of problems with becoming a landlord. Emotions are getting in the way of the cold hard numbers of property investment.
I was talking to a real estate agent down the street this week and she confirmed that there is not much for sale in Central Otago at the moment and that there is a strong demand for rental properties. So my first problem with becoming a landlord is lack of supply when trying to purchase a decent property and my second is that I really like people. Let me explain. I think I would take very seriously the role of custodian of someone else’s home, because even if I owned it, it would be their HOME. I would never propose someone live in a house that I would not be happy to live in myself. This is a major problem as the cheaper homes I look at appear cold, poorly insulated, old, in need of an update and generally uninviting. I have lived in enough crappy rental properties throughout my life to know that I would not like to inflict that on anyone else. If any of you have rented in North Dunedin as a Uni student in July you will understand what I mean! If I was asking someone to pay me weekly so I can retire in style I would expect that I would feel kind of grateful for that. Maybe I have just been scarred by years of terrible university rental properties?
My next problem is that if I had a tenant I would want them for life but that does not seem to be the way of it. Homeowners seem to want their cake and eat it too. Both homes we rented in Central Otago when we moved here were also on the market. Both of them sold. So the owner collected maximum rent and then kicked us out anyway. You feel so insecure as a tenant that you are always looking to purchase your own home (as we did as soon as we could). I know of several people in my area who have to vacate their rental property for a month over summer so the owners can saunter in for their summer holiday. How unsettling is that for the whanau (family)!?
I know several people who invest in property and it kind of seems like a lot of hard work finding and maintaining tenants and properties. Plus, THEY have to work HARD to keep pumping money into the bank to feed the machine that is their property investment portfolio. If a job is lost or a payment is missed the flow on consequences can be dire.
My next sticking point is the interest you have to pay back to the bank. Below I have a very crude example showing interest repayments.
My example is based on current LVR (loan to value ratio) rates which mean you need a 40% deposit. So, to get into a rental property I need to come up with this huge deposit first and I would need to do this by leveraging off the house we live in and own, investing and saving, and/or selling the family jewels. Thats a lot of money to scrape together to get into an investment property.
House Price: $400,000
Deposit: $160,000 (that is eye wateringly high)
Amount borrowed: $240,000 (looks reasonable due to the high deposit)
Term of lending: 20 year term at 6%
Weekly rental return: $400 per week
(there will also be other costs for me to cover: rates, insurance, maintenance etc)
This is the kicker:
Interest paid over life of loan: $169,000
I need to repeat that:
Interest paid over life of loan: $169,000!!!!!
TOTAL REPAID ON $240,000 initial lend: $409,000!
So I pay back the $240,000 the bank lent me and give them an ADDITIONAL $169,000 for the privilege. Bugger investing in houses, I think I might start a BANK!
I am hyperventilating right now folks, I’m stressed just THINKING about it let alone doing this as a real investment. But this is actually considered a LOW number due to the fact I had to come up with such a LARGE deposit. And this is just ONE property remember.
BUT as Katy Perry would say “What? Wait. No, no. no. no. Bring the beat back”. Lets think about this some more...
To help me understand WHY ON EARTH Kiwi’s see this as a good idea I reached out to a super clever savvy investor, let’s call her Anne, who has many investment properties and she explained why it works out well for her. She instantly had my respect when she explained to me that after losing her father when she was almost ten she had the conscious thought that she would need to rely on herself in life to succeed and that she was the one in charge of her own destiny. From that point on she saved. She left school and went straight to work and by age 22 she and a friend went half shares in her first property. She would later buy them out but the seed had been sown and over the last 20 years she has been acquiring good properties to rent out.
Whereas I get STUCK on the total amount of interest I have to pay back on just one whare (house) Anne does not even bat an eyelid. She explains her relationship with her bank as a “partnership” whereas they agree to lend her the money and she agrees to meet all payments due. She is looking far far far into the future and basing her numbers on the principle that a house doubles in value every ten years. Therefore she reckons that after 26 years my fictional house will be worth closer to $1.6 million than the $400,000 its worth today. Umm, something to think about yes?
Her tenants have been paying rent which has effectively been paying her loans at the bank but the capital gain on the property far outweighs even substantial interest payments made. She used the example of her Mum who bought a house for $10,000 in the 1970’s. She still owns it today and it would be worth around $400,000. Ummm, I'm really beginning to see Anne’s point here! Indeed if I DID have a second property, or third, or fourth I would be taking advantage of these low interest rates and would be upping my mortgage payments as high as I could to nail my debt at the moment.
Prior to connecting with Anne I didn’t appear to know any people who actually own their rental properties, instead of the bank owning them. After 20 years of steady buying, she now owns a few of them freehold, but then has borrowed against them to purchase others.
And from our correspondence I now understand the key difference between someone who owns a single house and calls themselves an investor and someone, like her, who owns many many rental properties and calls themselves an investor.
The difference is this:
- She has a deep interest in the real estate market
- A very solid understanding of the financials of each investment property
- She has a strong partnership with her banker
- A long view of the game, she is in it for the long haul and holds each property for a long time
- She gets a huge buzz when searching for a property
- A great connection with the tenants she puts in her property is crucial to her
Houses wear out, they need work. If you have spent 30 years paying it off chances are it needs a new roof, windows, kitchen, bathroom. She factors all of this into her calculations and said she buys quality homes instead of a large quantity of homes and keeps them in top shape.
It sounded to me like a lot of work juggling it all, when compared to just investing in index funds, but because she enjoyed the process she was happy to do the work.
At what point will she reach this utopia of owning all of her houses outright and enjoying the rental income (and the increased value of each property if she chooses to sell)? She has calculated that she will have them all paid off in ten years and will then be able to live off the rental income. That will be some retirement and she will be in her early fifties.
And we can’t mention the word ‘house prices’ without a nod to that city at the top of the country. Auckland property prices are still going mental… does anyone else think that the journalists report on the angst and unfairness of the wannabe Auckland home owners whilst neglecting to film the actual home owners who are dancing with glee in the background as their house values increase by the hour? Anywhoo…
I started thinking about this blog and was sitting very firmly on one side of the fence; that is, opposed to owning a rental. I’ve finished up UNDERSTANDING why people do it and it has been great to meet a woman who sounds like she is right on track to achieving financial freedom by investing heavily in property. However, I also know people who have achieved financial freedom through the less hands on route of steady saving and savvy investing in things they never have to touch. I think that they are both sitting even with their returns.
The ‘problems’ I found that stopped me getting into investing in houses are just smoke and mirrors really; I have had many chances to get involved but at the end of the day I’m just not that into it. Anne clearly has a passion for it but I just don’t. For me my buzz is looking at share prices, playing around with buying other things such as gold etc.
So, what I’m taking out of this is:
wherever you choose to invest,
whatever you choose to invest in,
just start something,
understand what you are doing completely,
develop a passion for it and stick at it for the long haul.
Life is a journey, not a destination so enjoy the process along the way instead of focussing on ‘when I retire’. Seize the day yadda yadda yadda! You might be worn out by the time you hit your magical retirement number so you might as well make the most of every day when the sun is shining RIGHT NOW.
Very good watch:
I’m grateful to a The Happy Saver subscriber, who alerted me to a story on Fair Go about a couple who were drowning in debt who took the advice of a company called www.enableme.co.nz to get back on track. (scroll down to the bottom of their homepage to watch the video) They were paying ‘interest only’ on their mortgage so would NEVER have paid it off. What a crazy concept! AND they were further financially stretched as they had a second property as an investment. An extremely interesting watch and I’m going to look a little deeper in the company that helped them when I get the time.
I am not much of a tellie watcher but I did enjoy this on TVNZ:
THE HARD STUFF WITH NIGEL LATTA Getting Old: The Retirement Bomb