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The Many Paths Of Property Investment

While traditionally Kiwis buy their own home and then look to build an investment portfolio, that’s not the only way, writes Stevie Waring.

By: Stevie Waring

30 June 2022

The Situation

I was working with a Wellington-based couple (Jeff and Vanessa) who owned three investment properties around the country; two in Wellington and one in Auckland.

They were renting and wanted to start a family. That’s why they were thinking about buying their own home in the capital. But at the same time they were also wondering: “Should we just buy more rental properties instead?”

They wanted to spend $2-$3 million if they were going to purchase their own home.

But, if they did that, it would mean they wouldn’t be able to grow their investment portfolio further because they would run out of borrowing ability.

So there was a trade-off; it was one or the other. They couldn’t do both and still have the home they wanted. Let’s see what the right decision was for them.

The Options

If they decided to purchase their own home, they’d have a lot of stability in their family life. They could also renovate the property, but it would also mean increasing their exposure to the Wellington property market, which currently looks over-cooked.

Our number-crunching at Opes Partners reveal the main council areas in Wellington are 3-15 per cent overvalued.

So, purchasing such a high-priced home would stop them diversifying their property ownership outside the capital.

Their other option was to move to a higher-end rental property like the one they would have purchased if they bought.

In this scenario they would continue purchasing investment properties and increase how much they spent on rent each week.

‘Financially, upgrading their rental and purchasing investments makes more sense’

The numbers on this are interesting. There is less rental demand for high-end properties compared with the average property.

Based on our numbers, if Jeff and Vanessa rented they would pay a 3 per cent gross yield on the high-end property they rented, but the gross yield they would receive if they bought an investment property was just over 4 per cent.

So they’ll pay around 3 per cent to their landlord and receive 4 per cent from their tenants.

Said another way, they’d earn more rental income from the investments than they would pay their new landlord. So financially, upgrading their rental and purchasing investments makes more sense.

But this does have its pros and cons. Firstly, they’ve got less security in tenure. Most higher-end properties on the rental market are former owner-occupier homes.

The owners have often moved out of town for work but don’t want to sell their house – just in case they’re back some day. When that happens Jeff and Vanessa will have to move out.

Similarly, if the property they end up renting isn’t perfect, there’s little opportunity to renovate. It’s not their house.

The Decision

For this couple they decided to upgrade their rental property and continue investing outside Wellington, because while the security of home ownership was appealing, they preferred to look at their portfolio from an investment point of view.

Today, they’ve got two new builds under construction; one in Christchurch and another in Auckland. And they’re about to move into their upgraded rental property in two weeks.

The Lessons

The most significant learning here is that you can take a different path in property investment.

While traditionally Kiwis buy their own home and then look to build an investment portfolio, that’s not the only way.

We’re seeing more “rent-vestors” enter the market. This is particularly true for younger people who don’t want to commit to an owner-occupier purchase, but are happy to own an investment.

Jeff and Vanessa’s story can also teach us about diversification. With two properties in Wellington, they were already heavily exposed to the capital’s property market.

So when you’re expanding your property portfolio, it’s worth thinking: “Do I need to widen my exposure and diversify around the country?”

And the last point is to run through the numbers when weighing your options. In this case, it worked out cheaper to rent and buy investments than purchase the equivalent property as the main home.

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