The regions… a golden opportunity and breathtaking yields at low prices… or a minefield of disappointment, vacancies, high maintenance, low employment and gangs.
Most Auckland residents who invest outside the big smoke do so for two reasons; lower prices and higher yields. This makes perfect sense because if you could achieve the same results in a bigger city you would naturally do so.
My day job is to help investors buy in different areas all over New Zealand. We cover a lot of different areas and from years of experience know what it takes not just to buy well in different markets but to set yourself up for long-term success.
Here are my top 5 tips for investing outside of Auckland.
#1 Be very clear on what outcome you want and invest accordingly
If I could separate out those who consistently do well from the rest it would be right here. If you have a very clear plan on what you want to achieve from your rental property investment and by when, then you are more likely to make decisions that move you towards that goal.
A large capital windfall in retirement 30 years from now is a very different goal from creating $50K in passive income in 15 years, which is different again from someone who wants to build up equity that they can use to buy their own home in 3 years. Different goals, different resources and different timelines mean different strategies.
If you find yourself constantly chasing after returns you hear others are getting and looking at 10 different markets unable to decide, your problem is probably that you aren’t clear yet on your strategy so are subconsciously copying parts of others and getting confused. Take the time to get this right.
#2 Operating costs are the same (or more) as in the city and will eat up more of your income
The first rates bill often comes to a surprise to investors. The property cost 1/3 of what my Auckland home did, but the rates bill is the same? It might be higher. Councils in the regions have a lot of area and infrastructure to cover and a much smaller population base to fund that from.
A new roof isn’t cheaper because the house is in the Manawatu and a shower costs the same in Whangarei as it does in Mangere. Your insurance *might* be cheaper, however this is no longer a given either.
What does this mean? You need to be a bit savvy when looking at appraised yields. Most properties in New Zealand are marketed with a gross yield for residential and very cheap properties with high yields can look deceptively good.
There are reasons to choose one area other than yield of course, however to compare different areas just on cashflow, you will want to use net yields. To calculate a net yield, take annual rent and subtract fixed costs (rates, insurance, maintenance and vacancies), then divide by your total price (purchase plus renovation). A 6% gross yield property in one area might have a similar net yield to an 8% gross yield property elsewhere.
Another exercise that highlights this and illustrates how much of your rental income is taken up with fixed costs is to write down each cost in terms of the number of weeks rent it will take each year to pay.
For example, if you have a property in Auckland that pays you $600 per week and the rates are $2,000, then it takes 3-4 weeks to pay your rates. A property elsewhere might rent for $350 with rates of $2,500, so it will take 7-8 weeks to pay your rates.
#3 Remember that in non-property investment circles, yield is a measure of risk (AKA be careful of small towns with few jobs)
Every so often I will see an investor asking about a town I’ve never heard of and since we don’t have that many towns in New Zealand this can be a worry.
When you see a cheap property with a very high yield always ask yourself why the property is so cheap. The answer will usually be a combination low population, poor condition, too far to commute to a bigger job market and either few local jobs or only one employer.
Be very careful with these as the aftermath of a meat works or milk factory leaving town can be devastating. Tokoroa is an oft-quoted example, the town’s population collapsed when technology innovations slashed employment in forestry in the 90’s and only in the last 5 years does it seem to have turned the corner economically.
With very cheap properties it is also helpful to do the “how many weeks rent does it take to pay X” exercise from above.
#4 Local knowledge will save your skin
Why do most investors buy close to where they live? They know the area and are comfortable with it. Rental properties in parts unknown still cost hundreds of thousands of dollars but this time you don’t know the town, what drives the economy, what streets are good or bad, where houses see frequent tenant turnover and where people stay for several years.
Working with a local property finder or buyers’ agent, who has a fiduciary responsibility to get you a great property investment (as opposed to a vendor agent, whose responsibility is to pull in multiple offers and sell for the highest possible price) is one way that you can both get access to good deals first, while avoiding the lemons that many out-of-town buyers snap up. A local specialist will also have on speed dial good property managers, tradespeople, building inspectors and other professionals to help you handle all aspects of due diligence and repairs from far away.
Over time a good buying decision will earn you tens of thousands in both cashflow and capital gain, dwarfing any upfront spend to get a great. A bad decision can result in just the opposite as well as a massive opportunity missed.
#5 Use a property manager
I know investors who have rentals at the other end of the country that they “manage” themselves. To me, here are the main roles of a property manager:
- The letting process: marketing your property, viewings, vetting applications, managing the move-in process, lodging bond and ensuring documentation is correct
- Inspections: Quarterly or more (check with your insurer) and filing inspection reports
- Fielding day-to-day maintenance requests, verifying and actioning them
- Resolving problems in the tenancy such as damage, rental arrears or other incidents and following the RTA and Tribunal processes correctly
- Advising landlords of their obligations and rule changes
I don’t see how you can expect to do any of this effectively remotely, particularly if you don’t know the market, aren’t familiar with the regulations, do not have local tradespeople contacts and cannot visit to address problems or enforce the rules. Some people rely on family or friends, however they are not trained for this so why put your relationships on the line? Your financial future is tied up in this asset so it’s best to take care of it professionally.
Out of town owners with no or poor local management are easy pickings for investors looking to snap up “problem” properties. Don’t become one yourself.
There is one other benefit and that is to advise you on how to get the most out of your rental. It is very easy to spend too much (overcapitalize) or too little (underutilize) your asset and a property manager will have their finger on the market pulse. We consult with good property managers in the areas where we operate for each client purchase to make sure we have our numbers spot on.
It is easier than ever before to invest in markets where you don’t live. I personally have done very well investing in Wellington despite never having lived there, while most of our clients are out of town or even expat investors buying from overseas. What will determine your success is how clear you are on what you want to do, understanding the numbers and tapping into local knowledge both when you buy and also in the long term. Good luck.