Take a typical rental property worth $400,000 returning a gross rental of $400 pw.
After rates, insurance, repairs and maintenance, the net rent will be about $13,000 before tax.
A rental return of 3.25% pa. before tax – not a lot !
So it is pretty clear property investors need about a 5% capital gain as well to get a total return of around 8% to make investment worthwhile.
But the super edgy officials and regulators might kill good capital gains
They really fear another global financial crisis, so are watching housing markets like hawks and the outcome could easily be;
- More and more official action to cool prices
- Very low capital gains in property
What does this mean for property lovers?
Either capital gain will be more muted.
Or another bust or GFC comes along, and people with high mortgage debt could lose a lot, if not everything.
Younger property investors
Younger investors starting out usually borrow heavily. With prices so high, and officials taking action, be very careful about borrowing heavily - very careful.
Analyse all known risks and factor them in. Remember they can always raise interest rates too.
As soon as you reach some critical mass, reduce debt and diversify.
Mature property lovers
They probably have several properties and have little or no debt.
They often have no other investments of any significance either.
If rental returns are only about 3%, capital gains are skinny, and risk of official action is ever present, the answer is obvious.
Reduce property holdings and diversify.
Spread your money across bonds, property and shares.
High quality bonds on and offshore are low risk and liquid – a key foundation in all investment portfolios.
Shares – not just any share s— use asset class funds - easy to get over 5,000 shares in a highly efficient low cost funds offshore.
No matter how much you love property, keep it down to say 50% of your total investments, and put 25% into bonds and 25% into shares.
Remember all NZ property is built on shaky ground.
Advantages of this approach
Money offshore mitigates NZ earthquake and foot and mouth risks
Access to cash – you can get cash out of bonds and shares within a week
Bonds and shares combined are likely to generate returns just as good as property
Nb. both property and shares take time to deliver good returns
Bonds and share markets are not under attack by officials and governments
Supplied by Alan Clarke, financial & retirement adviser, & author. His second book is virtually complete, & he also writes regular articles for the media & on line – see www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge.