In New Zealand, if you tell someone you’re an “investor”, they will immediately think – property.
It’s like a drug in this country.
If you’re saving money, it’s to buy a property.
If you’re learning to invest, you’re learning to invest in property.
If you made a lot of money, you made it through property.
When I worked as an accountant, we did taxes for lots of wealthy people.
Not a huge percentage owned stocks, but almost all of them had an investment property.
Why are we like this?
Is taking out a $600k loan to buy a one-bedroom fix-up in Onehunga to rent out for $400/week such a great investment?
Now, I’m sure it’s better than blowing all your money on a BMW and designer clothes and a vacation.
But what other investments are on the table?
And how do rental properties compare?
Let’s have a look.
What’s Wrong With Property? The Numbers
Whenever you make an investment, the most important thing is always knowing the numbers.
If you want to invest in a stock, you need to know:
- Gross profit
- Net profit
- Annual growth
- Dividend yield
- Earnings multiples
- Free cash flow
- Forecasted growth
It’s no different when investing in a property.
Are you going to make money?
There’s only one way to find out.
Work out the numbers.
Let’s break down your average rental investment.
I’ve been the accountant for quite a few, so I have a pretty good idea of how they look.
Here’s a common enough example:
A $600k house, renting for around $550/week.
Say you’re browsing open homes, and you decide you want to buy this as an investment.
First, you most likely need to save 20% for a down payment, so that’s $120k.
You will need to talk to a bank and borrow the remaining $480k.
Then you will probably want a lawyer or conveyancer, especially if it’s your first purchase. This is because you don’t want to sign anything you don’t understand and hasn’t been looked at by someone on “your side”. A lawyer for a property purchase will cost you maybe $1,500.
You would also want to have the property inspected, especially if you’re not a builder or experienced investor. A property inspection will cost you around $500.
Before you settle on the house, the bank will probably want to see proof of insurance. Insurance on a $600k rental property will cost around $1,500 a year.
So all-in-all, you’ve put up approximately $120,000 for a deposit, $3,500 for additional costs, and borrowed $480k.
Great! You own a rental.
Now the fun part starts – $550/week passive income just for being a landlord, right?
But it’s not that simple.
You borrowed money, remember?
You gotta pay it back.
Right now, you can get a 5-year fixed rate of around 7%.
However, let’s just say (very optimistically) that you can find something for 5%.
Let’s pump that into our mortgage calculator:
That works out to a monthly mortgage payment of $2,576.
You’re bringing in $550 per week in rent = $2,200 monthly.
Even at a very optimistically low-interest rate, you’re not covering the mortgage.
At 6% or 7%, you’re definitely not covering it.
So at best, you’re probably $350 a week out of pocket.
Now – that’s just the base picture.
We still have a few curveballs to throw in.
Who’s doing all the work?
The above assumes you will handle all the property management yourself.
- Finding tenants
- Replacing tenants
- Tenant interviews
- Record keeping
- Tenancy agreements
- Negotiating rents
- Collecting bonds
- Collecting rent
- Property inspections
- Resolving disputes
If you work full-time, it’s likely you don’t have time or energy to be doing all this, so many landlords will hire a property manager.
A property manager generally charges around 10% of your gross rent, so in the above case, $55 per week, plus possibly some other one-off fees.
Repairs and maintenance is more than you think
My father owns a couple of rental properties, and when I’m in Auckland, I help him out sometimes.
Here’s what that has taught me about properties:
Everything will break at some point.
Obviously, a roof doesn’t just last for an unlimited amount of years.
At some point, it will need repairing.
At some point, an air conditioner will stop working.
At some point, a pipe or toilet will break.
At some point, the hot water will stop running.
Properties wear and tear like everything else, so every single thing will need to be repaired or replaced eventually.
A roof repair might cost you $5,000 to $10,000. A burst pipe maybe $1,500. A new paint job, maybe $5,000. A new shower, maybe $2,000. A crack in the driveway. The letterbox needs fixing. The cooktop won’t start. The carpet needs changing.
If you amortise these over the lifetime of your ownership, you’re probably paying $400-$500 a month in repairs and maintenance, that can become due in big lump sums at any time.
Being a landlord comes with many other expenses.
Bank fees on a mortgage might cost you $10/month.
Petrol costs from driving to and from the property regularly.
Rates on the property in the example above are $1,900 per year.
There will be selling/agent fees when and if you decide to sell the property.
All of this eats into your returns.
Let’s put all these numbers together to get the big picture. How good is this investment?
In Year 1:
Rental income: $550 x 52 weeks = $28,600
Mortgage payments: $30,921
Property inspection fee: $500
Management fees: $2,860
Repairs and maintenance: $4,800
Bank fees: $120
Total expenses: $44,301
This means we’ll be cashflow negative in the first year to the tune of $15,701.
In the eyes of many property investors, this isn’t an issue.
In fact, it’s expected.
“I lose $15k this year, $15k next year, $15k the year after that, but in year four I will sell it for a $100k gain! I’ll make an easy $50k!”
Is that how it works?
Sure, that happens.
But, seems like a lot of work (and risk) to make $50k.
Is this really the best investment you can make?
An alternative property investment
Here’s another option.
You’ve saved up $120k for your rental deposit, plus $1,500 for a lawyer, $1,500 for insurance, and $500 for a property inspection.
This means you’re sitting on $123,500 in the bank.
It will take you less than 10 minutes, and cost you $25 in brokerage fees.
The Goodman Property Trust is one of many real estate investment companies in NZ that owns many of the most valuable properties in the country. So, you are still investing in property, but instead of a house in Manukau, you’re now a part owner of many flagship retail, office and industrial properties around New Zealand.
As an owner, you’re entitled to rents (obviously!)
The yield on GMT is currently 2.6% p.a, paid quarterly.
On a $123k shareholding, that’s about $3,211 per year, or $800 every 3 months, paid into your bank account.
The value of GMT shares have also grown in the last 10 years from $1.05 to $2.25 per share, an annual growth rate of 8.01%.
Using our compound interest calculator, we can see if that trend continues, after four years, your $123,500 will have grown to $170,000:
There are zero ongoing costs. Just the one-off $25 brokerage fee to buy the shares.
You don’t even need to do any taxes. Since all property trusts on the NZX are PIE investments, you don’t need to include anything in your tax return. All the taxes are filed and paid automatically for you by Goodman.
So, which is better?
If we invest our $123,500 in the 4-bedroom rental in Manukau, and sell it for a $100k gain after four years, over those four years we will have:
- Received $114,400 in rent
- Received $100,000 capital gain (taxable)
- Paid $96,000 in mortgage interest
- Paid $47,500 in other expenses
- Paid $21,000 in agent commission (3%).
For a total gain of $49,500 (before tax).
To make this gain, much additional work was involved. This would include surveying open homes, finding a property you want to buy, finding a lawyer, property inspector, talking to banks and mortgage brokers, collating tax returns, bank statements, payslips etc for loan application, negotiating loan terms, having a tenancy inspection, buying insurance, finding a property manager, organising repairs, rates payments, finding an agent to sell the house, getting your lawyer again, waiting for settlement, and possibly an accountant to help you prepare and file taxes for each of those four years.
Not to mention – the cost of all your time, which in New Zealand, is worth at least $22 an hour (minimum wage). If you spend 100 hours on the above, you can cost that at $2,200.
Not to mention – once you sell the house, if you want to keep getting returns on your money, you need to find another house to invest in, and do it all over again!
If we invest our $123,500 in Goodman Property Trust, after four years we will have;
- $46,500 in capital gains (non-taxable if held as long-term investment)
- $13,000 in dividends
For a total gain of $59,500
There are no costs involved, other than a $25 brokerage fee.
(Technically, you are paying costs and management fees indirectly, it’s just Goodman handles it all for you).
There is also no additional work involved. Just sit back and let the Goodman CEO and his team do their thing!
And if we ever want to sell it, it can be done in 10 seconds with two swipes on our phone and another $25 in brokerage fees. We’ll have the cash in our bank account in 24 hours without ever talking to a bank, lawyer or real estate agent.
Why I’ve Never Purchased An Investment Property
Once again – it’s all about the numbers.
I’ve crunched the spreadsheets on probably thirty or forty potential property investments in my life, in various different countries, and it’s the same thing every time.
The numbers have never added up.
Even while living in places like Thailand and Malaysia, I talked to some agents where it was possible to buy condos for $100k in cash.
I crunched the numbers. Still didn’t add up.
Can rentals make money?
But it’s usually not a lot of money, and always for 100x more work than just buying a stock or REIT.
When the options are to put $100k on a downpayment, go into debt, have monthly repayment obligations, and go through all the nonsense and hundreds of hours of work involved in being a landlord, or … put $100k into an REIT and go on holiday for the year? And get roughly the same (or maybe higher!) return?
I prefer the second option every time!
Not to mention, the second option leaves you with many options and flexibility.
Unlike a house, I don’t need to put the entire $100k into one investment.
I can put 30% into an REIT, 30% into the NZX 50, and 30% into the S&P 500.
I can put 50% into an REIT and put 50% in a savings account for a later opportunity.
Even when selling, I don’t have to sell the whole thing.
I can keep 50% invested, and sell 50% to spend or invest in something else.
I can manage it all from my phone, without ever needing to ask permission from a loan officer or deal with a tenant.
So – are rental properties a great investment?
They can work out great sometimes, and if you do find a property where the numbers look excellent, and you’re prepared to do the work, then go for it. There are definitely rentals like that out there.
But don’t fall into the trap many Kiwis do of thinking property is everything.
In my experience, there are often much better options on the table, especially when you take into account the amount of time required, the additional stress, the additional risk, and the difficulty level.
Knowledge is everything!
Work out the numbers, assess all your opportunities, and make the best decision available to you.