My Pet Hate
19 June 2018
My Pet Hate
My pet hate is investors buying a crap property, in a crap location, with no opportunity, no strategy, and just hoping it jumps in value. Gambling on capital gains can work in some locations, and for some people, but, in general, I think there are smarter ways to invest.
Current discussions/comments 1 - Let's buy in Whanganui as it is great cash flow.
Just about every day at the moment, there is someone asking a question to a property forum: "Should I buy a rental in Whanganui?" And, generally, the first comment they put is it will be cash flow positive.
Is that true? If you buy a standard rental in Whanganui, would it be cash flow positive?
First Rental I found:
- 3 bedroom, 1 bathroom
- $320 per week rent. 8.65% gross yield based on 50 weeks.
- Lots of work required, and lots of long term maintenance.
I looked up the rates, got a quote for insurance (www.initio.co.nz), worked on 100% finance and 4.5% interest rate, and estimated repairs and other costs - my cash flow was -$1,241 per year. Or, over 10 years with my predictions, -$31,841 as I expect interest rates to rise.
So a 8.65% gross yield in a small town does not mean it will be positive cash flow, and this example was still negative cash flow!
Current discussions/comments 2 - Let's buy in Tokoroa. It's going to be the next big thing and jump in value! Or, Tokoroa is going to get huge capital gains!
Generally Auckland booms. Then Hamilton and Tauranga follow. Then the rest of New Zealand follows. Sooner or later this finds it way to "hick" towns like Tokoroa. Generally, Tokoroa will boom a bit too, but the key questions is: "Will it hold the gains?"
This is the sales history form RPNZ of a property in Tokoroa.
March 2008 was close to the last peak in the market. Then sold four years later, drop of $50,000 or 42%!
So be very careful as small towns can be less stable, and in the next recession are likely to drop back in value!
Overall, be careful of small towns, especially if the population is declining or the area is reliant on one industry. I'm not saying you can't invest in small towns, but you need to buy smart and add value, rather than buying a crap house, in a crap area and just hoping.