The pros and cons of investing in rental properties

 

Property is a popular, and desirable, investment for Kiwis, and can offer excellent returns over the long term. But it’s not the easy road to riches that many people think, writes Andrew King of the NZ Property Investors’ Federation.

The good

• Having rentals is a business that you can run and control any way you like. You choose the level of risk you expose yourself to. You choose the type of property you buy, the area, and the tenants.  

• Like other businesses or shares, you have two ways to earn a return, through asset value increases and rental income.

• When planned well, it can allow you to create or build up a lot of equity.

• While property prices rise and fall in cycles, prices have generally and consistently risen over time.

• Property prices are not as volatile as, say, the share market, so banks are more willing to lend money on housing. Using borrowed funds is called using leverage, and when done well this can amplify your returns. This is a double-edged sword though, as leverage also amplifies losses when you get it wrong.

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• Although rental prices have been increasing faster than inflation over the past few years, usually they gradually increase in a consistent way at about the rate of inflation. Over time, they start to pay you an income.

• You can work on and manage your rentals and kind of provide yourself with a part-time job. Work you do on the property can also increase the value of the property.

• There can be a sense of pride in providing a good home to someone.

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And the not so good…

• The tax advantages many people believe property investors get don't exist. In fact, property is taxed more than other assets or investments.

• When you’re buying a rental property, you usually have to borrow a lot of money and this is risky. You almost entirely take on the risk of interest-rate rises, so when you’re borrowing you need to plan carefully.

• Rather than a part-time job, investment property starts out more like an internship. You give your time for free, in the hope of getting a return some day.

• Compared to shares or investing in a fund, property is a lot more work. People think you’re lucky to own property, but it is more like the quote: “The harder I work, the luckier I get.”

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• There is a low view of rental property owners. We are considered so unprofessional that we don't even qualify for the list of least-trusted professions, therefore telemarketers get to be at bottom of that list.

• Although it may be a changing attitude, many people see paying rent as dead money and pay it reluctantly. It’s difficult to get a good cashflow return, which makes rental properties difficult to buy. This is probably why only around 7 per cent of the population own them.

• People confuse successful flash car-driving developers and property traders as investors. A property investor owns property for the long term, providing a tenant with a home. Most I know drive Toyotas.

• Rent arrears and damage are a real risk, but if you have good property managers in place, it isn’t as big a risk as you might think.

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First published 3 July, 2018

Story by Andrew King, executive officer of the NZ Property Investors' Federation.

JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.


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