Hi guys,
I’m 25 and currently live in Auckland, New Zealand.
I’m new to property investing and am currently looking at purchasing my first investment property here in NZ.
I was hoping that I could hear some of your opinions on purchasing property/holding property during poor economic times. Based on how the global economy is performing, driven by the major China slow down, US market unease, the massive global commodity sell off and the on going issues in Europe there is the potential the global economy could be plunged into another recession. Whether this happens in the next 6 weeks or the next 6 years it looks very likely that there will be a major ‘correctionary’ period.
Based on peoples experience and property investing knowledge is this a good time to invest in property? Are the risks to great for someone like myself who is likely to be highly geared? What would be the best strategy for someone like me looking to invest in there first property?
Thanks for all your time and I look forward to hearing what peoples thoughts are.
Cheers
BenHi Ben,
That is a very open ended question, and all you will really get is peoples thoughts. Any serious property investor is going to tell you it is always a good time to invest in property, it is just a matter of where to invest. No matter what, people are going to need a roof over their head.
If you are seriously entertaining investing in property, please talk to Olly Newland before you do anything. He is a seasoned Auckland based property investor. He is honest and won’t sell you any thing. Some time with him will save you from making a serious mistake.
The risks for someone like you who is highly geared are very high irregardless of how the economy is going. Have you looked into a ‘worst case scenario’ exit strategy and reducing or adjusting your level of exposure? An exit plan is just as important as every other stage.
No idea what it was in Auckland but I remember reading that the Sydney median dropped about 10% from $575k to $525k during the GFC. Pretty bearable if you’re set up correctly and have a buffer just in case you’re let go. If you’re already worrying about what could happen, imagine how bad you’ll be when it does happen!
This shows how previous events have impacted property prices in Melbourne. Pretty weatherable if you’ve planned properly ;)
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This reply was modified 8 years, 8 months ago by Scottsdale. Reason: Pic didn't show
Hi Ben,
I don’t think there’s ever a bad time to invest in property, but I think one of the first things you need to ask yourself before putting yourself into a highly geared position is regarding your financial position and job security. Including the family home I own 3 properties, all with an LVR of 80% so I myself am highly geared. I’m more than comfortable being highly geared for the most part, but being in the middle of an extended quiet period in terms of my employment income due to a number of economic factors, I’ve been weighing up the pros and cons to being so highly geared in this current economic climate.
The most important factor (I believe) is how secure is my job/regular income? If you’re confident you have job security and that regular weekly income is coming in then that’s a good position to be in. I’m sure that in just about every instance of someone being highly/negatively geared, the weekly shortfall of cash is made up from their employment income. If you can’t make up the cash shortfall on your investment you’re ultimately not going to be able to keep it for very long regardless of economic conditions.
In saying that, if you can find the right investment property for your situation, then your out of pocket expenses may be minimal, therefore making it easier to handle any economic volatility. Even though I have a high level of borrowings, I get a good rental yield on my 2 investment properties (around 7% each) which puts them just about at neutral gearing in terms of how much they cost me on a weekly basis.
Another option to consider is to invest in a Real Estate Investment Trust (REIT). I must admit I don’t know a lot about them but could be a good way to get started. They offer reasonable returns and you don’t need to invest hundreds of thousands of dollars to get started, therefore reducing the risk from taking on too much debt in an uncertain economy.
cheers
PeteClearly its better to buy when the market is flat. However what is really important is that you buy good property. In other words stay away from small apartments in the city in large blocks also avoid house and land packages in outer areas. Naturally dont touch in any market Student built accommodation. These properties will fall further than anything else once the market slows. It happens because these properties are downgraded in value by the banks because of the banks exposure.
Look at townhouses or apartments in small blocks ideally properties that will appeal to owner occupiers as well as investors. These properties will level out but not go down in value and will always appeal to quality tenants.
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Thanks a lot for the answers guys. I appreciate all the comments and have taken them on board. Its good to hear some real life perspective.
@wiggles2 Thanks a lot for the link I will have a look into this and try and get in touch with Olly, his advice on the local market here in NZ would be incredibly valuable.
@scottsdale To help minimise the risk of the first property and lower the amount of initial cash outlay I have a friend/business partner who is on the same page as me and is looking to get involved in property as well. We are also looking to get the first property in either Hamilton or Tauranga (two cities outside of the Auckland region) which are both growing at a good rate and have reasonable rental returns. Thanks for the graph cycle of property over the last few decades, that was really interesting.
@pjewitt thanks for the advice. We are still contemplating how heavily geared we want to be as it is possible for us to get a 90% loan. Both of us have very secure jobs with potential to grow our salary bases over the next few years. I have been looking into the REITs as well and will put some money in them at some point.
@nigel-kibel thanks for the advice on the property types. Its definitly something which can be quite hard to figure out. One thing we have been trying to do is proper due diligence in the areas that we are looking at buying to try and find the best deal.
I do have another broad type question for you guys. I have read Steves Book and understand the principles behind him acheiving 130 properties in 3.5 years but in reality I struggle to see how he was able to show that he could service the debt required to purchase all those properties? Was it possible due to the times that he was in? Did he have more equity available than the book indicated at? Were the rental returns substantially better than what they are now? I have done the numbers for properties in Hamilton and Tauranga based on the current market and I dont understand how this is possible. If anyone could help shed some more light on the servicing of such loans that would be awesome.
Thanks again for all your time, I appreciate the comments.
Cheers
Clearly its better to buy when the market is flat. However what is really important is that you buy good property. In other words stay away from small apartments in the city in large blocks also avoid house and land packages in outer areas. Naturally dont touch in any market Student built accommodation. These properties will fall further than anything else once the market slows. It happens because these properties are downgraded in value by the banks because of the banks exposure.
Look at townhouses or apartments in small blocks ideally properties that will appeal to owner occupiers as well as investors. These properties will level out but not go down in value and will always appeal to quality tenants.Wise words nigel catch up soon
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Hi Ben,
In regards to Steves’ book I’ve wondered the same thing in regards to buying so many properties in such a short period of time. I must admit it was a number of years ago now that I read it so much of it I don’t remember, but I will say that times were different years ago. I bought my first ever property in 2001, a 2 bedroom freestanding unit for $81k. I lived in it myself for the first couple of years, but when I moved out and it became an IP, it was immediately a positive cashflow property. I had a mortgage of $120/wk and was getting somewhere around $160/wk in rent. I imagine that properties like these were far more in abundance in times gone by. I am skeptical that such success is possible these days, although success on a smaller scale I can see as a possibility.
The potential trap that I see though with chasing positive cashflow properties at the moment is that what happens when a property that is currently cash flow positive at approx 4% interest becomes a property at 7-8% interest? How many people will be able to cough up the extra cash when their mortgage may double when interest rates revert back to the average?! Particularly if there’s multiple properties to service.
cheers
Pete-
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