Buying an investment property is all very well, but how do you use it to build your wealth? Andrew Nicol, of Opes Partners, explains in the final part of this four-part series.
Building Wealth Through Property
When you have one rental property, you’ve already taken a big step towards securing your financial future. Two could be even better than one.
But many New Zealanders realise after they’ve bought one or two rentals that they’ve hit a roadblock. A big, solid, financial roadblock: the bank won’t lend them any more money.
If you’ve carefully planned your investing, thoughtfully structured your lending and your ownership, and bought suitable properties, this likely won’t happen to you.
But if it’s too late for that and you’re jammed up against that finance roadblock, there could be ways to get past it.
Are you on target?
You have two choices, hold or sell. By restructuring your loans and ownership, sometimes you can change your position and make a bank see that you’re an excellent lending prospect. Then you might want to hold.
You also need to consider whether your properties are helping you reach your goals. If they’re not, you may want to sell the loss-making properties and buy different ones.
It feels as if that goes against the usual mantra of ‘buy and hold’, but you want to be holding onto a cash cow, not living with an albatross around your neck.
Grow your holdings
When you have yourself sorted out with a balanced portfolio that allows you to buy another property, you can continue to grow your holdings until you reach the point where you’re on track to hit your targets.
You might be surprised how quickly this can happen. For some of our clients, it takes only three properties. Take couple Greg and Mei. They’re both 45, have professional jobs, and earn a combined income of around NZ$180,000, which supports their two daughters and their home loan of NZ$550,000.
They have 20 years before they retire, and they want to have NZ$1,500 a week to live off in retirement. Assuming they’re going to be retired until 91 (for Greg) and 94 (for Mei), that means they need around NZ$1 million in retirement savings when they reach 65, if they include NZ Super. (If you leave out NZ Super, they’ll need NZ$1.63 million.)
The Sorted calculator says they need to save NZ$1,515 per week to make up the shortfall. That’s a lot of saving for a family with relatively high living costs. Instead of saving that money, they can invest in property.
1. The first property they buy, right now at age 45, is a NZ$500,000 house and they top it up by NZ$100 a week for the first 10 years. It could grow in value by 5 per cent annually.
2. Two years later, they buy another property for NZ$550,000, which needs a top-up of NZ$120 a week for 10 years and also could grow by 5 per cent annually.
3. Their third property is a dual-key apartment purchased three years after the second one, for NZ$650,000. It costs nothing to top up and could grow by 2 per cent per year.
When they reach 65, Greg and Mei own the following properties:
1. A house worth NZ$1.65 million with debt of NZ$500,000: equity of NZ$1.05 million against a total spend of NZ$52,000.
2. A townhouse worth NZ$1.35 million with debt of NZ$550,000: equity of NZ$800,000 against a total spend of NZ$62,400.
3. A dual-key apartment worth NZ$887,000 with debt of NZ$650,000: equity of NZ$237,000.
They could have a total equity position of NZ$2.087 million, having spent NZ$114,000 on their properties. This might solve their retirement problem.
It could be a good choice
For many, property investment can be fairly easy and relatively passive. The key is to get it structured correctly and hire good property managers to run it for you.
Of course, property investment isn’t right for everyone, and every investment comes with risks. Be sure to see a financial adviser, who will help you work out if property investment is right for you.
There’s a reason that the world’s richest people are almost always heavily invested in real estate. Greg and Mei’s example shows exactly how it might work, on a much smaller scale, for many New Zealanders.
Published 26 May 2019
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.
Sign up to our newsletter to receive the latest news, updates and event invites from JUNO investing magazine.