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Don’t Be A Sheep

With so many different strategies, don’t be swayed by what the majority is doing, writes Aaron Tunstall.

By: Aaron Tunstall

1 April 2016

Apartment prices have soared and that always puts yields in jeopardy. But comparing our in-house rental statistics from one year with the next shows some very strong results. The average weekly rent in February 2015 was $354.

The average weekly rent in February 2016 was $391.50, an increase of 10.5%, which goes a long way to maintaining solid yields for Auckland apartment investors.

Apartments have been a fantastic investment over the past five years. As I have written many times in this column, their huge price increases (around 50% in the past 12 months) are the result of a long period of having been seriously undervalued.

This is obviously changing and the prices are coming more into line with what you might expect considering the values of other types of properties.

Usually, this would make apartments slightly less attractive to investors, but they remain a good choice.

A Sure Bet

With rents now at all-time highs and extremely unlikely to drop, apartments remain the best-yielding category of properties in Auckland. You can buy an apartment for $350,000 that will rent for $500– at 7.5% a better yield than you’ll find in almost any residential dwelling.

For the many, many buyers who still want to put their money into Auckland, apartments are one of the best ways to maintain a cashflow neutral portfolio. The prices are also achievable compared with a traditional home, a more important factor than ever in Auckland now the Reserve Bank wants you to put down 30% on investment properties in the super city.

Let’s say you can draw down $100,000 in equity against one of your Auckland properties. Where should you put it? How about a nice standalone threebedroom home in Hamilton? You can buy a $500,000 house and rent it out for about $420 a week.

Unfortunately, you’ll still have to put your hand in your pocket to cover the $455 required each week to service the $400,000 mortgage at 4.29% for two years over 30 years (but do negotiate for some cash, too). On an interest-only loan, you’ll get away with $330 a week, but at some point you’ll need to start chipping away at the principal. And don’t forget the hefty maintenance costs and rates.

Or, you could use it to buy a $350,000 apartment in Auckland bringing in around $500 a week. A deposit that size leaves you with a mortgage of just $250,000 at 4.29% fixed for two years – leaving you with a weekly payment of just $284. Even with the body corporate levy and rates that’s going to leave you cashflow neutral at worst, and you’re paying both principal and interest.

Now, you’re probably thinking the value of the Hamilton house will increase far more than the Auckland apartment. You might be right. Personally, I’d rather buy the apartment and use the cashflow and increasing equity to help me buy a second apartment sooner.

Stand Alone House

Once I had two cashflow positive apartments, I could use the extra income to buy a modestly cashflow negative stand alone house. (Which I would probably buy in Auckland, though that sort of attitude is probably not going to win me any friends south of the Bombays.)

I’m not saying this is the right strategy for you; don’t be swayed by all the press about Auckland investors fleeing the city. Just because everyone else seems to be jumping on the bandwagon doesn’t mean you should follow suit.

Obviously I’m in favour of apartments, but countless other strategies can help you on your path towards financial freedom. Don’t be a sheep: do your own research, crunch your own numbers and develop your own strategy. It’s well worth the effort.

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