Are rental properties still worth it

Is rental property investment still worth it?

Across New Zealand, the appeal of traditional residential property investment seems to be in decline

Property investment has been a great method of wealth creation for many New Zealanders over the years, especially for generations such as the ‘baby boomers’. But recently, a lot of things have changed, or are about to, including:

  • Especially in larger cities, yields are too low to make a cashflow profit,
  • It is becoming harder to offset any rental property cashflow losses against other income,
  • Investors face higher compliance costs such as additional costs for heating and insulation,
  • There is now limited or no capital gain in some areas, and a reduced possibility of capital gains moving forwards,
  • More favourable tenancy terms for tenants have been proposed,
  • Social pressure to make housing more affordable is only likely to increase, and
  • There is the possibility of a capital gains tax.

The success of New Zealand residential property investors in recent years has been supported by many factors, including:

  • Banks have been willing to lend money,
  • House prices always seemed to increase – enabling even more money to be borrowed,
  • A favourable tax regime existed, and
  • Rental increases could be passed onto tenants relatively easily.

It seems we are now entering a new era – one where residential property investing needs to be assessed as just another part of an overall investment portfolio rather than the sole component of retirement plans. Buying and retaining an investment property should be viewed in the same way as buying any other type of investment.

One major advantage of property is the willingness of banks to lend against it. Conversely, obtaining 80%, or higher, lending for a business, a managed fund or some other investment such as shares would be almost unheard of. For example, try going to your local bank branch and asking them for a loan of 80% so you can buy shares in that very same bank – they’ll probably laugh before rejecting your request!

New Zealand government and industry commentators all state there is a shortage of housing and if conventional economic theory was to be applied, then house prices should continue to rise. Unfortunately, we are facing the converging of several factors which point to house prices remaining static nationally, and actually falling in selected areas over coming years. The demand for both rental housing and owner-occupied housing varies from region to region. If a region has high house demand and high regional rent prices, and house prices are affordable, then assuming funding can be obtained, house prices should increase over time.

In regions where house demand is high but the rents and purchase costs of a home are unaffordable and beyond the reach of the average renter/buyer, then rents and house prices will probably have to fall to meet the market or they will slide sideways for a few years. Already, demographic changes are occurring. People are exiting high-priced regions, immigration is slowing in the likes of Auckland, and traditional renters are looking to stay at home with parents, delaying having families or just cramming more people into a dwelling. Over time, the market will adjust to what it can afford.

A potential capital gains tax will scare away many traditional property investors. While no-one can know what may happen with future legislation, as a guideline it seems logical that if the intention of owning investment property is to primarily make a capital gain then an investor can expect to face some form of future taxation. However, if the intention is to buy and hold the property for the long-term and receive a better income than if you had the capital invested elsewhere, then that will likely drive a different decision-making process around what sort of investment property to buy and where it should be located.

The writing is on the wall with regards to residential property speculation. If property investment is to be one part of a well-diversified portfolio, then think carefully about the risks and expenses in owning such an investment and assess the cashflow profit against the risk adjusted return of other investment opportunities.

It would be the pleasure of the team at Milestone Direct to help you work through your decision-making regarding property investment, or your existing or potential property investment loans.