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Focus On Fundamentals

In times of uncertainty, it’s crucial to apply the same investment rules as in the boom times, writes Nick Gentle.

By: Nick Gentle

30 April 2020

I write this as we head into the last weekend of the level four lockdown and I can say with great confidence that we do not know what is going to happen in the property market.

On one hand, the country is at an economic standstill, waiting to start trading again. It looks like NZ Inc. will start to do business with at least itself from next week, however our trading partners are all on their own health, political and economic timelines.

On the other hand, interest rates have plunged; the Government is going to do everything they possibly can to support people financially; we still have a massive housing shortage; and home will be looking more and more appealing to Kiwis based overseas (happily Australia is starting to get on top of their own outbreak).

This is just to show why it is so hard to make predictions… There is just so much going on on both sides of the equation. I try not to focus too much on games of “what if?” and instead just apply the same old rules: equity, location, cashflow.

The good news for us investors? Interest rates have crashed and the RBNZ is proposing to remove loan-to-value ratio (LVR) limits. I don’t really know what will happen to prices but those two measures will certainly help. If past downturns are anything to go by then holiday areas (second homes usually and this time Airbnb properties also) and higher end properties (people downsizing or staying put) will be impacted a lot more than regular housing near jobs. Rents may soften, but your biggest cost (interest) has too.

‘Your wealth as a property investor comes from building up and holding a profitable portfolio, not from timing the market and landing a single outstanding deal’

So What To Do Going Forward?

If you take one thing away from this article, then I hope it is this: your wealth as a property investor comes from building up and holding a profitable portfolio, not from timing the market and landing a single outstanding deal. You might wait until you have all the information in the world and pick up a property just at the right time – however, Jim over here’s portfolio of five that he bought over the same period, sticking to his rules but not looking for miracles, is going to blow your returns out of the water over time any way you measure things.

So, if history shows that the true winners of any downturn are those who kept investing through it, then how do you know what to buy and when?

My advice for buy-and-hold investors trying to find a property is the same as it has been at every point of every property cycle since forever. Does the yield work? Is there a reasonable pool of would-be tenants? Can you add value now or later? Does it set you up to continue investing and move you towards your goal?

If yes, go for it. If you want equity in the deal and it is not there at purchase price then consider properties where you can add value. While a discount up-front is nice, it is not predictable, while what you can improve is easy to see and cost out. When you strategically try to create wealth you want to set your own schedule, not to wait for a desperate seller.

You will want to avoid quirky properties that are hard to rent and really rough houses that will be chosen last and by the least desirable tenants. Landlords that take care of their properties will be fine.

Many newer investors look back on the GFC in amazement. House prices were how cheap? What they didn’t experience, and are now getting to know first-hand, is that there was a huge amount of uncertainty and fear out there – that is what kept many people out of the property market.

Future generations will look back on today as one of the most amazing times to be alive as an investor. We have not gone into an economic crash with interest rates this low and stimulus this high in living memory. If you can stick to some basic rules, put a reliable team around you to help you execute and focus on fundamentals (instead of the front page of the daily news) to make decisions, then you will do very well.

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