Clearly house prices generally have risen considerably in the past two years. A Recent NZ Herald Property Report states that the Auckland house prices rose on average 10.2% during 2012. At December 31 2012 they were up 12.4% from the 2007 peak. Since then. the media has had many anecdotes of specific houses that have sold for well above their expected sale price – and certainly well above their 2011 CV.
However, we need to be careful when interpreting these statistics. The first thing to remember is that the “owner-occupiers” property market and the investor property market can behave differently and may be at different stages of the cycle. What do Grey Lynn and Otara have in common? Not a great deal. Grey Lynn’s price rises have been driven by owner occupiers wanting to live in a gentrified suburb close to the city. Otara’s prices are largely governed by the investment return that investors expect from that area. Tony Alexander (BNZ Chief Economist) was reporting for some time that the “froth” in the market – and the premiums being paid – related mainly to the owner-occupier market. Clearly that has changed in the last year or so with heavily tenanted suburbs such as Mangere and Otara getting considerable investor attention and corresponding price increases.
But is it a good time to buy investment property? Yes – providing you have a clear strategy (why you are wanting to invest, i.e. the objectives you want to achieve) and clear buying rules (what criteria a prospective purchase must meet to move you towards your objectives).
Here are some examples of what Property Apprentice clients have purchased:
- A client couple bought a 2 bedroom unit in Otahuhu for $156,500. After a renovation costing around $15,000 ($25,000 if their labour was added in) this will value to around $250,000 – providing equity of around $70,000. With a rental return of $310/week (on a renovated cost of $181,500), the gross yield will be 8.9%. Their coach had warned them off a couple of properties they previously had under contract that did not meet their buying rules. They are glad he did and delighted with the result!
- Andy bought a 54m2 apartment in the CBD for $252,000. This will achieve a rent of $630/week – an impressive 13% gross yield. After allowing for four weeks vacancy and expenses, the net yield is around 8%. With a renovation of around $20,000 the property would be touching $300,000 – giving equity of about $30,000 (10%) in the property;
- Mark and Abby have purchased a 5-bedroom family home in Beachaven for $399,000. When they spend around $30,000 renovating the property it will have a value of around $500.000. They achieved this by staying focused on the result they wanted. They continued to watch this property as two previous offers ($485,000, $449,000) fell over and were ready to act quickly when the vendor reduced his price for a quick sale.
The last two deals shown have been done within the last month. Although it is more challenging to find the strong deals now that prices have increased it can certainly be done.
So what’s the message? Know your strategy, stick to your buying rules and persevere. And remember what Samuel Goldwyn said “The harder I work, the luckier I get.”