Investing made easy: Knowledge is power
Monday 3 August 2009
Investing in residential property is in the blood in New Zealand. But while we may have been able to get away with a "number-eight wire" style approach in the past, the current tough markets mean it's time to get savvy.
By Sonia Speedy
With the credit crunch blues still hanging over us, borrowing is harder to come by and banks want to see firm evidence that serious thought has gone into an investment before they will back it.
"The DIY attitude still pervades in terms of - ‘I'll ask my friends', or ‘I won't take any advice at all and just hope it works out'," says Craig Moffat, ANZ general manager of specialist distribution.
"I think the size of the investing decisions that we're talking about here require them to think differently if they want to make it a success and not end up in the challenging situations that some New Zealanders are finding themselves in at this point in time," he says.
Moffat says bankers are looking for people who are structured and organised in the way they go about their residential investment. This means investors starting out need to be clear on exactly what they're trying to achieve; have a firm game plan to achieve it; and a strong network of experts alongside to help them get there.
"I regard residential investing as a business and it should be treated that way. Good-quality businesses develop clear plans and clear strategies around how they're going to succeed - and I don't think this is any different," Moffat says.
University of Otago property investment and management lecturer Rob Churcher agrees.
"Investment is a business, it's not a hobby," he says.
"People have to get their heads around that. To be successful at it, you've got to commit time, capital and have some knowledge."
Knowledge is vital and Moffat points to the 2009 ANZ-Retirement Commission Financial Knowledge survey which shows that less than half of those Kiwis interviewed scored highly in terms of financial knowledge.
Naming your game
Bayleys managing director Mike Bayley also stresses the importance of the investor identifying exactly what they want out of their property investment and how closely they want to be involved with it - whether they want a passive or active involvement.
"When looking at property as an investment option, the investor should consider how long they plan to have their investment working for them and structure options around that - also taking into account potential volatility in the market; any perceived risk involved with a potential property investment opportunity; and ease of accessing investment funds at a set future date," Bayley says.
Investors need to think about whether their investment aim is about creating wealth, or cash flow.
"Is it their ambition to achieve say $100,000 of passive income after 10 years - is it that sort of plan? Or something that's more aggressive where they're interested in capital growth and they want to make their first million in five years by investing short-term and improving property, trading property, selling property. It's very individual," Churcher says.
Formulating your game plan
Churcher advises his students to perform a self-assessment on themselves using SWOT analysis to work out their Strengths, Weaknesses and the potential Opportunities and Threats as they relate to residential property investment.
"As part of that profile they need to think about their risk tolerance. What is their ability to tolerate loss of capital or shortage of cash flow - can they manage that? What level of returns are they seeking?" he says.
Investors also need to identify exactly what type of property interests them - "is it residential apartments in the Auckland CBD, or student rentals in north Dunedin?", Churcher questions.
"Are they going to be short or long-term investors; do they have patience; do they have a network they can tap into; what skills do they have for the business?"
Churcher says this information can then form the foundations of a property business plan that the investor can use to communicate their plans with investors or banks.
Building a support team
Having a strong support network onboard is vital for a fledgling investor. This should include an accountant; lawyer; lender; valuers and building advisers; tradespeople and property managers if you plan to use them.
Jackie Thomas-Teague, president of the Wellington Property Investors' Association and director of property management firm Rental Results, says property investors' associations can be invaluable for those new to residential investing, particularly for getting recommendations for your support team. You can find your local one through www.nzpif.org.nz.
Thomas-Teague says it is a common misconception that these associations are just for big investors.
"It is definitely a good idea for people who own just a couple, or are even just thinking about getting into property - that's the best time to join," she says.
Kate Gibson, a valuer with Christchurch-based real estate company Simes, says a registered valuer will also be an important part of your support team.
"Their knowledge and access to the latest market data will not only facilitate any required borrowing but also give you confidence that you are paying the right price for the property in the current market," she says.
Dan Lowe, an associate with accountancy firm Grant Thornton Auckland, encourages clients to be proactive and come to see them for advice as soon as they see a property they like.
"We deal a lot with people who have already done the deal, so your opportunity for planning and for structuring goes out the door," he says.
Accountants can help with structuring the ownership of investments; advising on tax mitigation; as well as helping with exit strategies. A lawyer is equally important, particularly to consult before signing anything.
As Bayley suggests, when building a relationship with a real estate agent it is important for investors to proffer all their relevant personal details and intentions, so the agent can match their needs with the best property. This advice stands true for getting the best from your support team generally.
So while true-DIY property investing has advantages, in a tough market like today, establishing a proper game plan and a support team to help turn those investment dreams into reality, is more important than ever.
Useful sources of information
- The Department of Building and Housing, www.dbh.govt.nz offers a plethora of information including on your legal rights and responsibilities as a landlord, dealing with problem tenants and useful information on rental rates and statistics.
- Your bank. Check out ANZ's offering at www.anz.co.nz in the home loans section.
Sponsored by ANZ.
Disclosure: The views expressed in these articles do not necessarily represent those of ANZ National Bank Limited (ANZ). ANZ does not endorse the views of others expressed in these articles.
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