Julia's investment property story

"Each time you buy a house the mortgage gets bigger and the risks get higher, so you need to be comfortable with that."

Julia (not her real name) and her partner have been involved in residential property investing for seven years.  In that time they’ve bought six houses, sold some of them, and currently own three houses as well as their own home.

They started when they transferred to a new city for work and decided to rent out their existing home.  But they had always been interested in property, and Julia says it’s something they would have got into anyway.

Julia says they see their residential property investing as ‘forced saving’ – but with much higher potential returns (and potential risks).  “We have a goal of being financially independent by 35,” says Julia.  “We’re 29 now and investing in residential property is the strategy we’ve chosen to achieve that goal.”

Choosing the property
 Julia and her partner have a clear strategy when it comes to choosing properties – they buy houses in good areas that need work (she describes them as ‘big old dumps’ and make improvements that will add value to the property.  “We spend around $5,000 - $10,000 on average to fix the worst things and then re-let them,” says Julia.  Her partner owns a plumbing business and they are able to do much of the work themselves. 

“We look for opportunities where we can add the most value.  I’ve become pretty good at looking at a property and assessing what it needs, what would make the biggest difference.  We try to make our houses somewhere we would like to live ourselves, which makes them more attractive to tenants.”

All their properties are within five minutes walk of where they live.  That’s important as they work on and manage the properties themselves, and also they know the area and the local market well.  “When it comes down to it,” she says, “purchasing decisions are made on gut feel, so knowing the market you’re in is important.”

Julia says having a good real estate agent makes finding properties easier.  Their agent contacts them proactively when he has a house he thinks they may be interested in. “Our agent knows our requirements and what we’re looking for, so he doesn’t waste our time and we don’t waste his.  A good relationship with an agent is important.  When you’re looking for a house they can do a lot of the running around and screening properties, at no cost to you.  And when you’re selling, a good agent is worth their commission.”

“It’s hard work to get a property up to scratch, but it does pay off if you’re willing to put in the effort.  For example, one house we bought had a rear flat which wasn’t really habitable – it had no kitchen and no electricity.  We put in a kitchen, wired it up, and let it for $200 a week.  We also painted the main house to make it more attractive, and the combined rent was enough to pay the mortgage from day one.  The value of the whole property increased by $60,000 straight away.”

Finding tenants
Traditionally, Julia has put ads in the local paper and advertised on www.homeads.co.nz to find tenants.  In the future, she’ll also advertise on TradeMe as it is an increasingly popular way to find homes to let.

Julia asks prospective tenants to fill out a form which asks for a range of information including who will live in the property, vehicle registration, pets, whether they have ever been involved in tribunal hearings, and crucially, previous landlords who can provide references.  She doesn’t do a credit check. 

“The more information people provide the better,” says Julia.  “But I also form a view based on the way they present themselves and what they say when they come to view the property.  So far we’ve had three bad tenants out of a total of about 25, and we’ve had past tenants come back and rent a property from us again, so we haven’t done too badly.  It is important to make the right decision because the quality of your relationship with your tenants is really crucial.  It makes all the difference when it comes to looking after the houses.”
 
Managing the property
Julia and her partner manage all their properties themselves.  Most of the time, she says, it’s quite manageable – she spends on average an hour a week just keeping things ticking over.  In between tenants, when work is usually needed to bring the place up to scratch again, it’s more like 3-4 hours a week on average.

However, things can go wrong and it’s not all plain sailing, especially with multiple properties. “It can be pretty hard sometimes.  When you lose two tenants at once, for example, it puts a bit of strain on your cash flow which is usually quite finely balanced anyway.  When lots of things happen at the same time all your energy goes into the properties and you don’t have much time to yourself.  You have to be pretty committed to it.  Having said that, the longest we’ve ever had between tenants is 3 weeks, so we’ve been pretty fortunate.”

Finance and Structure
Rents:
Julia uses market rent information from the Department of Building and Housing website (www.dbh.govt.nz/market-rent) to help her set rents.  This contains average rental information for all areas of New Zealand.  She also reviews the rents six-monthly, though doesn’t always put them up.  It depends on the tenant - keeping a good tenant happy is usually more important, as they will look after the property better.

Structure:
Julia and her partner have all their properties in an LAQC (Loss Attributing Qualifying Company).  That allows them to have all their debt together in one place, which makes it easier to manage.  Each property is bought with a 100% interest only fixed rate home loan.  That means they know exactly what their interest rate payments will be, which is important as managing their cash flow is critical.  They also have a Flexible Home Loan arrangement, which gives them access to finance if they need it, for example to fix up a property.

“Financing has become much easier now that our bank can see our history, determination and results.  Having a good relationship with the bank makes the whole process much more simple and flexible,” says Julia.

“Like most property investors, we operate by the seat of our pants a bit.  When we’re assessing the financial aspects of a property we start by working out what our fixed outgoings will be – home loan payments, rates and insurance.  It’s key that we have to be able to cover those payments.  Then we estimate how much it will cost to fix the place up.  It pays to overestimate that, because things can and usually do happen that you haven’t anticipated.  Then I compile a  spreadsheet showing our cash flow for each day, showing the money we have coming in from rent, my job and my partner’s business, and the money going out for our fixed outgoings – and we decide whether we can afford it.

We don’t really look for a minimum return – we’re more concerned about how much value we can add to the property, and whether we can afford it based on our projected cash flow.  It can be stressful; for example we decided to sell one house and buy another one because we thought it offered more value, and we bought the new one with bridging finance.  The other house took a bit longer to sell than expected, so that was a bit uncomfortable.  It worked out in the end, but you have to be able to cope with those situations.  Each time you buy a house the mortgage gets bigger and the risks get higher, so you need to be comfortable with that.”

Next steps
With the housing market coming off its peak, Julia says they will be careful about what they do next.  They are looking to upgrade their stock to higher quality so they can sell it more easily if they need to.

However, she says they enjoy property and would like to extend their involvement.  They would one day like to run a property management company, using the experience they’ve gained in managing their own houses.  They are also thinking about moving into commercial property, although Julia says it’s harder to get into – “it takes more money, interest rates are higher and so is the risk.  But it is something we’re looking at.”

Lessons
Julia has the following suggestions for people considering following a similar path.

• Property investment isn’t for everyone - being a landlord isn’t always easy.  The rewards are there but you do have to work for them.
• Decide what your objective is – cash flow or capital gain.  That makes a big difference to the type of property you buy, and where.
• Keep emotion out of your decisions.  It’s easy to get carried away, especially when you’re buying a property and it’s exciting.  But you make money when you buy, not when you sell.  Decide what you want to pay, how much value you think you can add, put in your offer and stick to it.  There’s always another opportunity.
• Look for certainty in terms of your cash flow – especially if you are getting into property investment for the first time.  “We made a bad call on interest rates on one house where we went for a one year rate at a 0.5% lower interest rate than the five year rate.  After that year interest rates went up so we ended up paying more over the long-term.  In retrospect we should have gone for long-term certainty.”
• Keep up with what’s happening in the market and do your research – Julia describes herself and her partner as ‘serial open-homers’.  By staying abreast you can sniff out a bargain when you see one, or at the least you won’t end up paying too much for a house.
• Debt servicing is the key – you have to have enough cash flow to meet your commitments.  Understand your personal risk profile and stay within your comfort zone.
• Get good advice – Julia says a good real estate agent, accountant and solicitor are invaluable and well worth their fee, as they can take care of a lot of the work for you.  The right relationship with your bank is also crucial from a financing viewpoint.