Time To Shuffle The Deck?
Does your portfolio need a review and redirection? Maree Tassell looks at alternative investment scenarios and their merits.
1 November 2021
A couple of years ago I was approached by an investor who had held some properties for several years but wasn’t getting much of an income from them. We ran the numbers and found that his yields vs current market values were quite low. The properties were standalone homes in good condition and made more sense to home buyers than as investment properties in the then current market.
Because our client had bought well originally and had built up to a strong equity position, he had options. We agreed on a strategy to sell down properties that made the least sense as an investment (if he were to be buying today), and to redeploy the capital into higher yield properties.
The properties he sold and what he subsequently bought had different characteristics:
• sold in a main centre and bought in a regional city
• sold standalone homes and bought multi-income dwellings.
What it boils down to is he was selling properties at a gross yield of approximately 4-4.5% and at the time the new deals we sourced yielded approximately 7% gross. There were two sales and then re-purchases and the yield shift equated to a gross cashflow increase of more than $50,000 for this investor.
By shifting his capital from two properties where rent growth had not kept up with value increases, into multi-income dwellings with higher cashflow income, the investor kept their capital intact and still invested, while significantly increasing passive income.
The new interest deductibility tax rules and rapid price increases realised over the last 18 months will have many investors rethinking their long-term strategies and goals. I don’t like the new tax rules at all, however if you have had a position in the property market over at least the last few years then you will likely have the opportunity to be strategic and redeploy your capital in a way that suits your long-term goals.
I am in a similar position with one property that I bought several years ago. After purchase I gutted and completely remodelled, and have held for several years since. The values in that part of New Zealand have skyrocketed, and that combined with the new tax rules have me mulling over a few scenarios, the three most likely of which are the following.
1. Do I sell and buy two properties in another area where I can build another dwelling on the site? Both increasing likely yield and shifting debt to a tax-deductible structure?
2. Do I sell and look to buy another multi-income property with similar potential to the original one and repeat the process?
3. Do I sell and use the money to buy and renovate properties for on sale (trading), and put off long-term decisions for another day? #1 and #2 above if done well would have me buying and developing to a gross yield 2% higher than I am selling at, and similar to our client of two years ago, through this process I would increase equity again and come out the other end with a higher cashflow income.
The new tax rules in particular will have many investors in a reactive mindset and wondering how they can continue to make property work, however it does not have to be that way. If you have a portfolio and are feeling stuck about “where to next”, history has shown that time in the market trumps just about any other strategy and what you might need to do is to “shuffle your portfolio deck” to position yourself to survive and thrive through the next property cycle and beyond.
At iFindProperty our first conversation with any investor is to review where you are at and your goals, so we can help decide on a direction for your next move. I’d encourage anybody who is feeling stuck to get in touch with us, or your own trusted advisers because in most situations you will be able to do more than you think.
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