Are you ready to run your rentals portfolio like a business? Or would you rather sit back and wait for shares to make you money? Martin Hawes says how you answer this is the key to knowing whether you’re suited to property or shares.
For years, I’ve listened to people debate which is the better investment: shares or property?
It’s not really a very sensible discussion because they can both be good for the right people at the right time, but bad for the wrong people at the wrong time.
In any case, if investment were solely about returns, it would be an easy game. We would simply find the asset class that was likely to give the best returns, and everyone would invest in that.
That’s a crazy idea, of course, and that’s the reason there are so many investments available: each investment suits certain people at certain times. That’s definitely true of residential property investment.
Property means work
Some people become very wealthy from property, but buying rentals is not for everyone. It can give good returns, but there are plenty of instances when buying property has been a disaster.
This isn’t simply about risk. Property can go down in value, the rents can stop coming in, and banks can call in loans, but there’s more to investment than simply risk and return.
Shares, bonds, and almost all other investments are about putting your money in and sitting back and waiting for the returns. Not so with property – it requires work.
In fact, property is much more of a business than it is a passive investment. Because of that, there’s a lot of effort required and, in my experience, the top property people are like small-business owners: they live, eat, and breathe their enterprise.
Good property investors go into the industry with an expectation that they’ll be managing their business.
If this doesn’t sound like you, you might want to think again about property. If you have a full-time job, have a growing family, and are in training to do the next Ironman, the chances are you do not want to add another block of work (rental properties) to your busy life.
Are the returns as good as they look?
People can get mesmerised by the returns from property. The use of gearing can add to this – it can seem that you can get massive returns for a quite small amount of capital.
In fact, those returns are not likely to be as good as they may seem initially.
This is hard to judge, because property is an investment that’s hard to analyse. When we try to judge the returns from property generally, we don’t really know what might have happened to investors and their properties.
Factors that affect returns:
· We may know the purchase price of some properties and how much more they’re worth 20 years later. However, we don’t know how much money the owners have sunk into the properties over that time. Houses may have been ‘negatively geared’, which means their costs could be a lot higher than the income they generated.
· We can look at average (or mean) house prices and see that the average price is much more now than 20 years ago. However, this doesn’t take into account quality – the average house 20 years ago was nowhere near as good as the average house today. We don’t know how to adjust for this change of quality.
· We don’t know what maintenance and improvements have been done. Kitchens and bathrooms may have been upgraded, or roofs replaced.
· We don’t know how much management time has been put into the rental property. Residential tenancies take a lot of work and that time has a value.
We can look at one particular property and, if the owner has kept good records, we can work out what the return was for that property. But we don’t know how other houses have done, so we can’t compare it against an average of other investment markets.
There may be some big costs in property which affect the actual returns (as opposed to the headline returns). My guess is the actual returns to property investors are nothing like as big as promised.
Have you ever wondered why there has never been a managed fund in New Zealand based on residential property? The reason is that when all costs are added in (including management time), there isn’t enough yield to make such a fund worthwhile.
You’ll be running a business
Rental property can make you wealthy, but it’s for those who are ready and willing (and able) to run a business. They have to set their strategy (the kinds of houses they want), attract tenants, manage debt, look after cash flow, negotiate buying, selling and leasing – and fit that into all the other things that they do.
To do that well is no mean feat.
Think carefully about property. The numbers are big, and you need to buy and manage your properties well. Despite that, for those who will take the risk and make the effort, the rewards are great.
First published 28 May, 2018.
Story by Martin Hawes
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. Martin is an Authorised Financial Adviser, and a Disclosure Statements is available from him on request and free of charge at www.martinhawes.com. This article is general in nature and not personalised advice.
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.