Lessons from the Last Boom/Peak
28 August 2018
Reminder: Provisional Tax is due today (28/8/18) for most provisional tax payers.
If for some reason you have not had a notice from us and you feel like you should be paying provisional tax, please contact us as soon as possible.
There is a great post on 25/08/18 on our Facebook page , if you need some further information on provisional tax.
LESSONS FROM THE LAST BOOM/PEAK
In a normal cycle, Auckland booms, then Hamilton/Tauranga follow, then other regions follow after that.
Over time, Auckland flattens or goes backwards. Hamilton/Tauranga then flatten or go backwards and the other regions follow after that.
Don't get carried away with the media and the property market!
It can come down! Buying on or near the top of the market has added risk!
- There is no buffer if the market comes back a little.
- Your interest costs are higher as you have paid more.
Example 1 – Built in 2007/2008
Losing $8,000 per year in cash flow
Had to sell 2014
TOTAL LOSS = $150,000 approx!
Example 2 – Purchased new late 2008
Losing $9,000 per year in cash flow
Had to sell early 2015
TOTAL LOSS = $98,000
I recommend being very careful if buying at the moment. Make sure you have a clear strategy and a buffer for extra costs or if interest rates go up.
I would personally only buy if the property was cash flow neutral or better, or if I had a strategy to add equity and long term turn the rental positive, such as sub-dividable.
Otherwise you are gambling on prices going up – They may do, or they could go down too!
CASH FLOW IS KING!!!
For both of the above examples where property investors lost money, the properties were very negative and costing a lot of cash each year.
While we always hope everything goes well, if things go badly and you get sick, or lose a job, then funding negative rentals can be very hard!
If you are buying long term rentals at the moment, I feel you need to be buying a property that is neutral at worst, or else negative at the moment but you have a short term plan to convert this loss into a profit. By subdividing, or adding a minor dwelling, for example, or paying down large amounts on the mortgage.
I hear all the time, that “we can add a minor dwelling later to improve cashflow”, or “we can subdivide this long term and sell the section to improve cashflow”, or similar comments that there is a project that can be completed to improve cashflow.
After the last boom in late 2007, the banks changed their lending criteria and made it a lot harder for investors to borrow. Therefore, a lot of investors who had these possible projects, could no longer get the finance to do them. So rather than having a house, with a minor dwelling making cash each year, they were left with a negative rental that was dragging them down.
If you have possible projects that can improve your cashflow, I suggest you try to finish them now.
INTEREST RATES – Don’t put all your eggs in one basket!
No one has a crystal ball, and no one knows what will happen with interest rates. Everyone is guessing.
Therefore, I generally suggest using a spreading approach and have some loans short term, some medium, and some long. The idea is to ‘not’ have all your loans coming up for renewal at the same time, otherwise if rates change all your loans could be affected.
With a spreading approach to interest rates, you win whether rates go up or down!
When the market peaked in late 2007, there were quite a few buyers who had stretched themselves too far. As property prices failed to go up over the next year or so, these buyers became more under pressure as they were putting in cash each week to top up their negative cashflow properties, but not getting the capital gains they needed. Last boom it seemed to take 2-4 years for these buyers to get further and further in trouble, and then finally to sell when they were desperate.
Therefore, there was great buying around 2009 to 2011, when there were quite a few desperate vendors in the market.
If you think the market will crash, or even go flat for a number of years as it did 2007 to 2014 (Rest of New Zealand excluding Auckland), then a good strategy can be to wait for 2-4 years after the boom and try to find some bargains.
I hope you found this useful.