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Meet The Market

Smart investors adapt their strategy to meet the market conditions, writes Maree Tassell.

By: Maree Tassell

30 September 2019

As part of my job I speak with a lot investors on the phone and regularly hear from buyers who have learned in seminars and read in books that they need to look for a 10% gross yield and 20% discount on market value when they buy.

If you are one of those people, bursting with enthusiasm and still new to the game, listen up…

Yes, there are times when you can buy 9% yields and 20% below value - I have done that before and so have many other long-term investors.

However, this is not one of those times – well not in most of the current markets in New Zealand. The property market is always changing and moving and experienced investors know that there are always opportunities to be had, whatever the market conditions currently are.

Right now, in most of the New Zealand regional markets, growth has been high and yields have tended to slow down as property prices have risen. The strong seller’s market with low-interest rates means that most of the time it is not possible to buy well “below value”. This is a normal and natural part of the property cycle and it doesn’t mean there aren’t good deals to be had. It is not necessary to sit around for years and wait for the market to change to suit one particular investment strategy.

‘You are often competing with home buyers and the advantage you have is that home buyers are generally emotional and are looking for their perfect home’

Buy Ugly

A great strategy right, now since you can’t usually buy equity (below value), is to buy ugly/tired and problem houses and create equity. As investors you are often competing with home buyers and the advantage you have up your sleeve is that home buyers are generally emotional and are looking for their perfect home. The houses that they ignore are the ones you want! Doing a renovation, adding bedrooms or making an illegal property compliant are just some ways you can build your wealth. And making these improvements on your investment also means you will be increasing the yield.

We have worked with a number of clients recently who may have purchased a property at “market value” but have successfully built their equity and cashflow by rolling up their sleeves and undertaking some improvements.

For example, clients in Rotorua recently purchased a block of four units for $630,000 which were renting for $220 per week each. A $60,000 renovation saw the rents increase to $295 per week and the value increase to $900,000. So that’s a $200,000 equity gain and just under a 9% gross yield. Several Wellington clients have similarly done really well by purchasing centrally and adding bedrooms to rent to the student market.

At the other end of the scale a Whanganui purchase for a client was obtained for $262,000 – the property was only returning a 6.5% gross yield. However, after a $30,000 renovation and helping our client find a good property manager a final yield of 9.8% was created. This was a problem property and there were “issues” – but look at the outcome, just from being creative.

Property is a long game. As long as you buy well for whatever the market condition you are currently in and then hold you will do well. The secret is to change your game plan for different seasons, and the best strategy right now is to add value.

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