Is a rental property still a good investment option?

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Paul1977

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#248196 14-Mar-2019 09:15

We are close to having the mortgage paid off on our 2 bedroom 1940s weatherboard home in Christchurch, and are now in the position of deciding what our next step should be as we plan for retirement (in 20-25 years).

Current house needs a new kitchen, so before we start spending we need to decide if we will stay there - because if we stay we would go more up-market on the kitchen (ie spend more $$$).

One thought is to do a more basic kitchen, keep the current house as a rental, and then build or buy something new for ourselves to live in.

What are peoples thoughts these days on a rental property as an investment?

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#2197719 14-Mar-2019 09:26

The negatives are bad tenants = losing rent if they fall behind and they take off, losing rent while you repair their damage, cost of repairing their damage

Long term there is no question its a good investment, although in todays climate its harder, but hard to see it not being the best option long term. If there is a GFC, the rent still gets paid.

Good tenants and keep on top of maintenance, yes. The tenants mean it can be an easy investment or a financial and emotional nightmare

Aredwood

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#2197722 14-Mar-2019 09:30

I vote no. Solely due to Labour being in power, and the risk that they might do more “knee jerk” type policies in relation to rental properties.

I wouldn't be surprised if a law that regulates rents gets enacted.

You also need to ask yourself the question. If I dont buy a rental property, what would I invest in instead?

Paul1977

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#2197731 14-Mar-2019 09:43

Aredwood: I vote no. Solely due to Labour being in power, and the risk that they might do more “knee jerk” type policies in relation to rental properties.

I wouldn't be surprised if a law that regulates rents gets enacted.

You also need to ask yourself the question. If I dont buy a rental property, what would I invest in instead?

I know nothing about investments so don't know where to start with other options.

tdgeek

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#2197739 14-Mar-2019 09:51

Paul1977:

Aredwood: I vote no. Solely due to Labour being in power, and the risk that they might do more “knee jerk” type policies in relation to rental properties.

I wouldn't be surprised if a law that regulates rents gets enacted.

You also need to ask yourself the question. If I dont buy a rental property, what would I invest in instead?

I know nothing about investments so don't know where to start with other options.

Shares, managed funds come to mind

How suitable is your house for renting? Does it comply with the new regulations for dry and insulated rentals? Landlords can be up for biggish money if they have sub standard houses, I imagine yours might be good as you live in it

chevrolux

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#2197756 14-Mar-2019 10:03

If you have the ability, no doubt buying property is the way to go. The problem now is everyone knows its a great deal and good investments are harder to find at the pricing level required. In Christchurch though, you have relatively high rents so probably no real worries in terms of covering a mortgage with the rent.

Even if CGT is bought in, and a CGT applies to the sale of the property, it still means you have made a profit.

The only other key thing is picking the right tenant. When we had a rental, we ran an open home ourselves, my partner did the official thing, and I just walked around like I was interested in the house (secret shopper styles haha). Over heard conversations I didn't like, those people didn't get a shoe in.

Fred99

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#2197759 14-Mar-2019 10:04

tdgeek:

Long term there is no question its a good investment.

There most certainly are questions. Many of them.

The most basic analysis suggests that house price inflation has progressed at a rate double that of the increase in income. While that difference may be only a few % annually, compounded over 30 years there's been a 145% increase in incomes but a 450% increase in housing costs.

Basic arithmetic tells you that can't continue indefinitely, the big question is only about when divergent trends correct.

tdgeek

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#2197771 14-Mar-2019 10:15

Fred99:

tdgeek:

Long term there is no question its a good investment.

There most certainly are questions. Many of them.

The most basic analysis suggests that house price inflation has progressed at a rate double that of the increase in income. While that difference may be only a few % annually, compounded over 30 years there's been a 145% increase in incomes but a 450% increase in housing costs.

Basic arithmetic tells you that can't continue indefinitely, the big question is only about when divergent trends correct.

The long distant past doesn't agree. Houses are like food, always in demand. The changes over tome are not linear, there will be no changes in house prices short term generally as the boom has already happened. House prices are at the peak, therefore yield is relatively low, it will catch up and be fine. You can only have so many houses in this country, but you can go for shares. As property peaks, shares are more popular so you have an over high P/E ratio due to the over valuation of shares. Internal issues such as competition for any one company can kill its potential, and your investment. So nothing is safe. In 30 years time, that house will be.

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nickb800

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#2197773 14-Mar-2019 10:16

I'd bear in mind that the housing market is pretty soft in Christchurch and likely IMHO to remain so until after the next recession. We are overdue for a recession based on historic economic cycles, but I still don't think it's likely in the next couple of years as there aren't many warning signs ATM (of course, id be a millionaire I'd I could accurately forecast recessions - I'm not).

This means that you should expect flat or possibly declining rents and house prices for 5+ years in Christchurch.

There is some regulatory risk around rentals, but we now know the nature of the healthy homes rules and I think the risk of further significant regulation is low as it would risk reducing the availability of rentals by too much

tdgeek

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#2197784 14-Mar-2019 10:25

nickb800: I'd bear in mind that the housing market is pretty soft in Christchurch and likely IMHO to remain so until after the next recession. We are overdue for a recession based on historic economic cycles, but I still don't think it's likely in the next couple of years as there aren't many warning signs ATM (of course, id be a millionaire I'd I could accurately forecast recessions - I'm not).

This means that you should expect flat or possibly declining rents and house prices for 5+ years in Christchurch.

There is some regulatory risk around rentals, but we now know the nature of the healthy homes rules and I think the risk of further significant regulation is low as it would risk reducing the availability of rentals by too much

Agree, at least 5 years in Chch. Although our place in the 3 years we had it is up 8% and another 8% in valuation. Interest rates will remain low for a while, but long term it will all even out. Buying a limited resource is often a good option

Fred99

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#2197786 14-Mar-2019 10:28

tdgeek:

Fred99:

tdgeek:

Long term there is no question its a good investment.

There most certainly are questions. Many of them.

The most basic analysis suggests that house price inflation has progressed at a rate double that of the increase in income. While that difference may be only a few % annually, compounded over 30 years there's been a 145% increase in incomes but a 450% increase in housing costs.

Basic arithmetic tells you that can't continue indefinitely, the big question is only about when divergent trends correct.

The long distant past doesn't agree. Houses are like food, always in demand. The changes over tome are not linear, there will be no changes in house prices short term generally as the boom has already happened. House prices are at the peak, therefore yield is relatively low, it will catch up and be fine. You can only have so many houses in this country, but you can go for shares. As property peaks, shares are more popular so you have an over high P/E ratio due to the over valuation of shares. Internal issues such as competition for any one company can kill its potential, and your investment. So nothing is safe. In 30 years time, that house will be.

I don't agree with that. The significant decline in NZ home ownership rates is one symptom of an imbalance that IMO should be worked to be corrected.

It's obscene that there are no rent controls yet governments hand out money to landlords in the way of accommodation supplement, while simultaneously allowing negative gearing of costs including interest, not available to private home owners.

Some first-world countries have rent controls, far higher population density, yet similar or higher home-ownership rates to NZ, have avoided what looks like a serious bubble that NZ appears to have, and have far higher investment in productive industries.

There's a term for an economic model destined for failure - it's called "rent seeking" - investment for income without that investment adding to productivity or overall wealth creation. According to NZ's opposition leader, that the "NZ way of life". If that's true, then we're doomed. It needs to change.

tdgeek

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#2197796 14-Mar-2019 10:36

Fred99:

I don't agree with that. The significant decline in NZ home ownership rates is one symptom of an imbalance that IMO should be worked to be corrected.

It's obscene that there are no rent controls yet governments hand out money to landlords in the way of accommodation supplement, while simultaneously allowing negative gearing of costs including interest, not available to private home owners.

Some first-world countries have rent controls, far higher population density, yet similar or higher home-ownership rates to NZ, have avoided what looks like a serious bubble that NZ appears to have, and have far higher investment in productive industries.

There's a term for an economic model destined for failure - it's called "rent seeking" - investment for income without that investment adding to productivity or overall wealth creation. According to NZ's opposition leader, that the "NZ way of life". If that's true, then we're doomed. It needs to change.

The Govt we usually have allows the market to manage things, this Govt we now have had added costs to landlords, although I do have am amount of agreement to sort our the shoddy damp house landlords. Rents, like shares align to the asset value, plus other variables. While renting doesn't add to wealth creation, its a required service, more so now that home ownership is too hard for most. If the demand is there, its a sound business. Over time it always has been, the time we are in now will pass. Should it slowly become less worthwhile, people will opt out

tdgeek

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#2197798 14-Mar-2019 10:38

What rent controls should we have? Genuine question

Fred99

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#2197807 14-Mar-2019 10:56

tdgeek:

The Govt we usually have allows the market to manage things,

Oh utter BS they do. I don't want this to devolve into partisanism, but the concept that "the market" is free and self-correcting is totally wrong WRT the rental market.

Government set policy which determines how the market operates, from prudential control on the banking system, tax policies, building and development controls, rent subsidies, direct investment in that market (state housing) etc etc.

All of those have a direct impact on house prices/affordability and supply, and investment returns from rental property.

tdgeek

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#2197813 14-Mar-2019 11:06

Fred99:

tdgeek:

The Govt we usually have allows the market to manage things,

Oh utter BS they do. I don't want this to devolve into partisanism, but the concept that "the market" is free and self-correcting is totally wrong WRT the rental market.

Government set policy which determines how the market operates, from prudential control on the banking system, tax policies, building and development controls, rent subsidies, direct investment in that market (state housing) etc etc.

All of those have a direct impact on house prices/affordability and supply, and investment returns from rental property.

It didnt work out very well did it? Unless you have 100% regulation, the open market will settle where it does , after the other regulations have done their bit. Right now house prices are high, rents are high, partly due to houses being high but also higher demand. So after all that, the demand for houses is low as too costly, Im not sure what rental yields are these days, but they are probably in ball park or a bit lower than the pre boom past.

What rental controls are needed? Put caps or a formula to decide the rent that can be charged?

gbwelly

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#2197827 14-Mar-2019 11:23

Paul1977:

What are peoples thoughts these days on a rental property as an investment?

I wouldn't be doing it now.

I do like watching the unintended consequences Labour will be suffering for their meddling. Rents will be going up as rental properties get sold to first home buyers reducing supply, due to lower headcounts in owner occupied houses. Ring fencing losses will also require rent to increase to cover the true cost of running the property.

The reason I wouldn't recommend it is house prices will be remaining flat for a while yet, and increasing rents will make it difficult for tenants to afford so higher chance of problematic situations.

People can argue all they want with me that rent can't go up any higher, but when you get over 80 people turning up to view the property you know that the upper bounds are still yet to be found.

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