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Investor Myths Busted

Current public rhetoric about property investors has left them feeling vilified, but much of it is based on misconceptions according to well-known investor Graeme Fowler. He confronts some of those myths.

By: Graeme Fowler

30 April 2019

One of the biggest misconceptions about property investors is that they are all wealthy. While some are, 99% are not: They have full-time jobs and struggle to make ends meet like most people. If a tenant doesn’t pay rent or unplanned maintenance needs doing, that money needs to come from somewhere. It might usually be tax deductible but you can’t claim that third back until the following year.

The majority of property investors have just one or two rental properties. They pay tax on the little left over after payment of the mortgage, maintenance, rates and insurance. It usually takes many years of investing in residential property before any real money is made. I know more investors who have gone bankrupt than I do ones who have been successful over the long term.

No investor I’ve ever met has wanted to be an investor so they could pay less tax. They go into it because they want to have a couple of properties freehold when they retire and not have to rely on the Government to support them. I’ve been investing for about 30 years.

I bought my first rental property in my early 20s after saving $25,000 from scratch. Seven years later, I sold the property for a $40,000 loss and ended up with no money once again. However, I did learn a lot and, rather than giving up, I put what I’d learnt to use.

Over the years I learnt how to buy, renovate and sell properties and have completed hundreds of transactions. I also own 80 long-term rentals. Both GST and income tax is paid on the properties that are renovated, while income tax is paid on the rentals.

Last year I paid several hundred thousand dollars in tax and, over the last 20 years, I would have paid more tax than 90% of people would earn in their lifetime. Yet many people believe that’s still not paying my fair share. Rather, they think it’s fair to up taxes until property investment is not worth doing any more. Which is what will happen if more taxes and regulations for investors are brought in.

If taxes are increased too much, you start losing tax revenue as people are driven out of the market. With all the changes they’ve already put in place, many investors have sold up and, if things continue, many more will as well.

Now there’s a waiting list of 10,000 people with nowhere to live and the Government is spending millions of dollars a week to have them live in motels. They are the very people that could rent those rental properties, but those landlords are being driven out of the market. And the problem is getting worse. More taxes and regulations will not help any of these people. Instead the problem will just get bigger until the Government realises that you can’t tax a country into prosperity.

Myth One: Less Investors Means Higher Home Ownership Rates

If more investors are pushed out of the market, there will be even less homes for people to rent; and that emergency housing list of 10,000 will keep growing. What happens when someone sells a rental? Either another investor buys it, or a person or family buys it to live in. If another investor buys it, nothing really changes. But if an owner-occupier buys it, it means there is one less rental property able to house a tenant family.

So where does the owner-occupier come from before they buy this property? They could be either upsizing or downsizing, or they could have been renting. These situations again will not change anything, as it hasn’t taken another property out of the available houses to rent.

But if they have been living with their parents, in a flatting type situation or overseas, this will affect the overall number of available rental houses.

That’s because more people live in rental properties than owner-occupied properties. So when one person moves out of an existing home into a new home, a rental property is taken out of the rental pool, but the tenant pool is not diminished to the same extent.

If I sold my 80 properties tomorrow, there would be a variation in buyer types, but it would still take away a portion of the overall properties that are available to be rented. Home ownership rates might go up a bit but, overall, the more investors that decide to sell up, the more the country’s rental stock will be reduced.

Further complicating the situation are some additional factors that contribute to the diminishing pool of rental stock. They are short-term holiday accommodation such as Airbnb, which offers the potential for greater cash flow returns for investors;
and the influx of seasonal workers who need accommodation.

About 35% of New Zealand’s permanent population now rent. If all private landlords decide to sell up, the Government is in no position to supply all the approximately 500,000 rental properties needed. So where would the tenants who still need rental accommodation be housed?

Myth Two: Investors Are Greedy Fat Cats

I think this myth comes from a few different things. Ignorance is one of them. Another is someone’s own idea of money. The other misconceptions originate from the media and the Government.

When the Government tells the public that what is needed in the economy is to transfer money from people who are rich to people who are poor, people get the idea that wealthy people are bad. Yet if it wasn’t for investors buying properties or business owners employing people, the country would be in a real mess.

It doesn’t help that the media often sensationalizes headlines, which means people get a distorted view of the facts. I’ve been involved with articles where people have jumped to false conclusions without reading beyond the headline and then commented negatively.

The result of this is that many people think investors are greedy, pay no tax and contribute nothing to society. These people tend to have poor associations around money. They believe money is bad so people with money must also be bad. Further, if they acquire some money, they often end up repelling it rather than multiplying it.

For example: I owned a franchise for 10 years and we had incentive targets for the employees. As a result of these incentives, they would often get a pay rise of about $10 a week. Each time this happened, I asked if they now had an extra $10 left over to save. They always looked at me weirdly and said “No, why?”. All of this serves to compound negative views of people who manage to make and hold on to money.

‘If I sold my 80 properties tomorrow, there would be a variation in buyer types, but it would still take away a portion of the overall properties that are available to be rented’

Myth Three: Investing Is Really Speculating

In my first seven years as an investor I lost all the money I’d put in. After that, I’d learnt enough to start again. Since then I have invested in three ways:

1. Buy and holds:
These are a long term investment. The goal is to pay the mortgage off over 20 to 25 years and then have the income. Until the mortgage has been paid, there is often not much profit if any. Many investors will run at a loss for many years and the majority never actually pay their properties off and get the income.

Out of my 80 buy and hold properties, 17 currently have no mortgage on them. Within the next eight years or so, about 40 of them will have no mortgage. The rest will be paid off in full over the following eight to 10 years.

2. Trading:
This is buying properties below market and selling, or buying, renovating and then selling. This can be profitable, but a lot of skill is needed to do it well consistently. In the last couple of years, I’ve traded about 50 properties. These transactions are taxed at a higher rate than income tax and GST has to be paid as well. Many investors don’t see the point in risking money trading because a huge portion is paid in tax.

3. Wraps (aka rent to buys): This involves helping families into their own homes by giving them a mortgage. I used to do this about 20 years ago. I would buy properties about 10% below “market value” and then sell them to people who only had small, or even no, deposits. I’d have a mortgage with a bank for about a 7% interest rate and would sell them on, at market price, for around 8.5%.

The tenants would pay a weekly mortgage payment, which included rates and insurance, to me. This gave me about $50 a week cash-flow for each property for setting it all up plus it got people into their own homes. They could refinance with a bank at any time when they had enough equity (usually only two to three years).

Unfortunately, both the banks and the IRD decided they didn’t like wraps. Some of the distaste was justified (because of some investors doing unethical things) and some was not. Additionally, government regulation changes made things more difficult. In the end, wraps were not worth all the hassle and so I stopped doing them.
In my view, none of these types of investments qualify as the type of speculative behaviour that we are led to believe “selfish” investors indulge in.

Myth Four: Landlord-Tenant Relationships Are Combative

Is there an adversarial relationship between tenants and property owners? Sometimes yes, sometimes no. Sometimes it’s justified and sometimes not. I employ property managers for my rentals. That means my tenants deal with my property managers who are great at what they do. But often investors who manage their own properties will end up in conflicts with their tenants. Either the investor is way too fussy about how they want the property kept or they don’t have the money for costly repairs.

The potential for such problems is now getting worse – due to all the new rules around insulation, heating, ventilation and so on. Many rental properties are now
better places to live in than the investors’ own homes.

On top of this, investors are facing tenancy law reforms and the new rules around the ring-fencing rental losses. Not being able to afford all the new government regulations and requirements is just another reason more and more investors will leave the market.

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