Do you get excited about the next 'hot' areas?

19 July 2018

 

Do you get excited about the next 'hot' areas?
 

I actually hate all the media comments about this area is booming, or that area is booming.  It generally distracts property investors into a short term mind-set rather than focusing on their long term strategy.  Obviously, some investors can make great money jumping from place to place, buying at the bottom of the market, having the area jump in value, and then selling to crystalise their gain (note: this is really speculators, not investors).  But many investors also don't; they generally jump into the area too late, haven't fully researched the area, have issues, and end up selling and losing money.
 
My main issue:  there is no long term planning or strategy.  It is just about jumping into an area that is supposedly booming and hoping it jumps in value.

Some strategies that could be considered:

  • Buying cashflow and using the cashflow to pay down the debt, ending with a debt free rental property after 25-30 years. Need to carefully look at the cashflow and is 8% or 9% gross yield actually enough to achieve this?  Probably not!  Also, what happens if interest rates rise slightly?  A major issue is that rates, insurance, and repairs can be very high compared to the rent, meaning that a high gross yield can still be negative overall cashflow.
  • If you have great income and no personal house debt, an obvious easy strategy is to use your high incomes to pay down the rental debt and end up with a debt free rental property giving passive income.
  • My favourite -  can you add value?  Can you subdivide and end up with 2-3 rental properties, with substantial equity gain and improvement in cashflow?  Or can you add a minor dwelling, add a bedroom, convert a lounge into a bedroom, convert a garage into a sleep out, or just do a smart renovation?
  • Buying at a discount obviously helps with cashflow as less interest.


A standard strategy used by a lot of property investors is to buy two rentals, hope they double in value over say 10 years, then sell one rental, so that you are left with one rental which is debt free, creating passive income.    The issue with a lot of the smaller areas is that this might not come true and there might not be the capital gains needed to make this strategy work!   After the last boom, a lot of smaller areas in New Zealand actually lost value – how would this affect you if you are relying on capital growth for your model to work?
 
Lastly, there are costs to having a short term focus, such as possible tax on gains, commission, legal fees, and/or break fees.
  
Hopefully this has got you thinking a bit about what you really want from investing in property?  And what is your strategy to achieve this?


Kind regards
 
Ross Barnett

 
 
 
 

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