RETIREMENT CALC

attach_money

The Growth Property Investment Strategy

The Buy & Hold Strategy.

There are several different strategies that you can implement to prosper in property investment. No single method is the best for everyone, but one is probably best for you.

The buy & hold strategy is the most popular method, possibly due to the low risk relative to potential reward. It simply says you will purchase a property with a view to making capital gains over a long period of time, by the value of that property increasing and/or rental income, but there is more than one way to do that.

This strategy is the least time consuming, hands-off approach to investing, as opposed to property flipping, which requires significant time invested into finding, renovating and selling properties regularly. It can be quite literally, set and forget, so is ideal for working people who want a nest-egg for retirement or a passive income.

We categorise the buy & hold strategy at three levels:

balanced property investment strategy

What is Risk?

With risk can come great rewards, but also the potential for loss. No matter what you choose to invest in, there is risk and reward to consider. It’s a balancing act.

Property is a low-risk, high reward investment category, but is not immune from failure. The risk matrix below shows how Property (as a whole) performs against other asset classes, but property has a risk matrix of its own, with several variables which this document will guide you through, showing how different properties have different risks and profitability profiles. We all have a different capacity for risk, so consider what your capacity is, then choose the property that will provide the best returns for you, while still feeling comfortable you haven’t over exposed yourself to risk.

Risk Matrix: Assest Classes

risk vs reward property investment new zealand

Risk and reward can be varied so suit most personality types and financial situation, by shifting three parameters:

1. Growth potential
Relying solely on growth with total disregard for rental income is high risk.

2. Yield
The more rent you receive
each week, the less risk you are taking, but you will sacrifice growth opportunities by doing this.

3. Quality
Better properties, such as brand new buildings, are safer investments, but more expensive.

Growth Approach.

Due to the economic nature of the property market, capital gain potential comes at a cost to rental income, and vice versa, so taking a strategy which focuses on acquiring property with maximum growth potential usually means forgoing some rental income and therefore increasing your weekly costs.

In a nutshell, a growth focused investor will acquire properties in more expensive areas, with larger parcels of land, expecting the value of those properties to increase in value within a reasonable timeframe, meanwhile contributing regular cash to the holding costs and upkeep, because relying solely on rental income will not be sufficient.

Capital gains typically provide a superior financial benefit overall, compared to what can be achieved from rental income, so a growth focused approach makes sense for investors with high incomes, reasonable cash deposits or both.

Relying on capital gains, even over a long term period is speculative, while rental income is more of a certainty, so while understanding the more you spend each week will probably result in more profit long term, do consider that ultimately provides more risk too.

pros and cons of balanced property investment strategy

Yield vs. Growth.

When you invest in property there are really only two things you’re looking for. Capital gains and rental income – preferably as much as possible.

As investors, we measure capital gains in terms of ‘growth’. Rent is measured in terms of ‘yield’.

Growth is considered most profitable, due to the long history of property values increasing, but also carries the most risk – if your property doesn’t increase in value, you’ve gained nothing.

Yield, on the other hand, helps to pay your expenses, and minimises your risk – If your property doesn’t increase in value, but you’ve been pulling in good rent, you’ve still made a gain.

It’s generally accepted that when you are choosing a property, higher growth will come at a cost of lower yield and vice versa. They’re both on the same spectrum, so it’s not like you get one and not the other – It’s just a question of scale.

It happens that way because it’s land that gives you growth and buildings which give you a yield. Land goes up in value, but people aren’t lining up to rent a bare piece of land. Meanwhile, buildings can actually depreciate, but that’s what your tenant is going to be paying you for.

So when you’re out shopping for a property, whatever your budget, some of your money goes to land, and the rest into the building. Your land budget will always come at a cost to your building, so your growth will always come at a cost to your yield.

MAXIMISING GROWTH
The level of growth you get from your property investment, though forecasting is always speculative, is your decision to make, based on what you buy and where. Given a purchase budget of any size, a growth investor will attribute as much of that budget as possible to land; the balance being left for a rent producing dwelling.

Property Type.

We categorize property into four types – apartments, townhouses, houses and land – written in this order which illustrates the size of the land each type has, relative to the size of the dwelling. The more land, the more growth you can expect, but lower yield.

Bare Land

Bare land is the purest form of a growth investment strategy. When you invest 100% in land you invest 100% in an appreciating asset, but will get 0% return on rent.

Houses

We all know what a house is – A typical Kiwi home, standalone on it’s own plot of land. Houses appeal to both investors and owner occupiers, so are easiest to sell when you come to the end of your investment journey.

Houses can have large plots of land, so enjoy good growth potential. If a house is your preferred property type, you’ll improve your weekly cash position dramatically, compared to bare land investment, so this could be considered a balanced growth investment.

Townhouses

Townhouses are often built in blocks whereby neighbouring properties share a wall, but they have a clearly defined plot of land which is owned individually. They have some common areas which owners are jointly liable to maintain, sometimes by way of a body corporate or residents agreement.

Often you can find affordable townhouses in premium areas because they have only a small plot of land.

Apartments

Apartments are built on ‘strata’ titles, normally one above another, meaning that you don’t own a particular piece of land. Instead, you own a share of the underlying land parcel, jointly with all the other apartment owners. There are also common areas and rules controlled by a body corporate, which you contribute regular payments towards.

Apartments don’t increase in value much but because they are the cheapest type of property to buy. With relatively high rental returns, they provide a great yield. A growth focused investor will not normally purchase an apartment.

Location.

Though it’s popular to buy a rental property close to home, exploring opportunities beyond the town or city you live in is a worthwhile exercise.

THERE ARE A FEW RULES TO CONSIDER WHEN COMPARING DIFFERENT TOWNS AND CITIES:

Smaller towns usually rely on one main industry to support the economy and employment. This makes them prone to Boom or Bust property values. Queenstown, for example, relies almost solely on tourism. Values skyrocketed on the back of a rise in visitor numbers from 1.6 million in 1999 to 3.9 million in 2019. Then Coronavirus hit.

More expensive cities, like Auckland, are expected to rise in value at a faster pace than less expensive cities. This is probably why they are more expensive.

More affordable cities, like Invercargill, have higher rents relative to purchase prices, but are not likely to enjoy capital gains to the same level as Auckland.

CHRISTCHURCH IS A UNIQUE MARKET.

Compared to historic trends, purchase prices are well below the national average, rental prices are high, and all other market indicators are strong, suggesting it is quite possibly the best of three worlds:

Growth potential: Good
Rental yields: High
Economy:
Robust

The other way to increase growth, given the same property type, is to buy in more expensive neighbourhoods. Normal rules apply though – expect lower yields.

christchurch property market where to buy invest suburb

Building Quality.

Though it’s popular to buy a rental property close to home, exploring opportunities beyond the town or city you live in is a worthwhile exercise.

BRAND NEW PROPERTY

Brand new property is most commonly bought ‘off-plan’, meaning you agree to buy it prior to construction. Of course, there are plenty of brand new properties available that are complete already, but you’ll usually find these selling for a premium price.

The best part of buying off-plan is that the sellers are usually up front about their price expectation, compared to sellers of existing properties who prefer negotiations, auctions or deadline sales.

Since the canterbury earthquakes, building standards have been raised dramatically, with engineered foundation design and ground remediation commonplace. For this reason it is logical to expect properties built post 2011 to always hold a premium resale value as buyers are wary of the earthquake history, substandard structural integrity and botched repairs.

Modern properties are well insulated, double glazed and efficiently heated, making them a comfortable and economical place to live, as well as meeting the minimum legal requirements of healthy homes standards recently introduced for rental properties.

Brand new property is in high demand for tenants, so you can charge a premium rent and expect less vacancy, but do be aware that your gross yield (rent compared to purchase price) will be lower, and your purchase price higher.

OLDER PROPERTY

The obvious benefit of buying older property is that you can find much cheaper options, and still expect rental income close to the level of a new property. That means a higher gross yield.

Being cheaper and dated, this can provide an opportunity to renovate and add value. Renovations cost money, but if you find the right property and don’t over capitalise on your improvements, you can create additional equity in the property, if you strike the right balance.

Most investors who buy older properties choose those which are made from permanent materials i.e. aluminium window frames and brick cladding, to minimise their future maintenance costs. Nothing lasts forever, so you’ll obviously need to replace things from time to time, but this is a good step in the right direction.

Avoid plaster clad properties built in the 1990s, as they are prone to weather tightness issues (leaky homes). Even a property of this nature which is actually watertight and has no signs of moisture damage will be tainted by the perception of leaky home syndrome, so could be difficult to sell in the future.

While the extra price can seem a lot at the time of purchase, based on actual cash outgoings it is almost the same price to own a brand new place compared to an older one of a similar size and spec. If you were to quantify higher maintenance and vacancy costs, you might discover a new property is actually cheaper. While brand new property costs more, it’s also worth more.

Risk Matrix: Building Quality

Yield
Strategy

Balanced
Strategy

(most popular)

Growth
Strategy

Flipping
Strategy

Keen to get started? Learn more at our next property investment event.

Register for our next property investment talk in Christchurch

Contact Us

0800 943 534

Property Investors Club
2/225 High Street
Christchurch CBD

email@propertyclub.co.nz