Podcast: How your investment strategy might change | Ep. 202

Posted by Ed McKnight on 20/04/20
How your investment strategy might change 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss how the Coronavirus might change your investment strategy. The decrease in interest rates have two effects:

They decrease the return savers get through term deposits They increase the return property investors get through lower borrowing costs

It is not likely that property investors can get a higher cash return from their deposit as opposed to keeping their money in the bank. These small changes in interest rates can have a big impact to the bottom line.

We also mention the Opes Partners Instagram. Follow us there to get more regular property investment content and updates.


Transcript of the Podcast

Ed McKnight: Hey, it's Ed from the Property Academy podcast. Look, this is one of the last episodes Andrew and I recorded in person together before the Covid19 lockdown. And look, I've just got two points to make before you listen to this episode. Uh, firstly, a lot of the interest rate movements that we said we expected to happen within this episode they've now actually occurred and have been passed on. So that's great to hear.

And the other thing I want to mention is within the episode we talk about that it's a great time to invest in property. I just wanted to jump in and add a caveat, that we'd probably recommend that you delay signing any new contracts until after the lockdown, but of course, use this time to get into the position so you can take advantage of any opportunities that arise after the lockdown. Just wanted to mention those two things, but now enjoy the show.

Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show, we're going to be talking about how your investment strategy may change based on the reserve bank OCR cut.

So at the time of recording, uh, the reserve bank has just cut to the official cash rate by 0.75%. So there's 75 basis points, and we're expecting that a lot of that is going to be passed on to borrowers. So at the moment, not now, of course, not all of that is going to be passed on to fixed rate mortgages. But let's say that. 50 basis was points are, uh, so there's 0.5 of a percent.

So let's say that interest rates decreased to 3%. Well, how was that going to impact investors in the market? Because of course, the share market, because of coronavirus has been down about 20% in the U S it's about down about 15%, at the time of recording, in New Zealand. So the share market is really down at the moment. And, and on top of that, now that we've hit the OCR cut, if that gets passed on term deposit rates are going to decrease.

So I've got a list of 12 month rates in front of me from ASB, Westpac ANZ and BNZ. They're all between two and 2.6% so if you put your money in the bank, you're going to get two to 2.6% before you, uh, before tax. Now, how does that compare to, if you were to put that money into an investment property?

And of course, this is the point, because interest rates are about to be cut quite significantly or will have been cut by the time we release this episode. It makes property much more attractive. Not just as an investment for capital growth, but as an investment for yield. If you've got a cash deposit as well. So we're going to walk through this cash flow as well. Andrew, do you want to just quickly walk us through the cash flow?

Andrew Nicol: So I'll take us through the numbers. So worked on a cash investment of a hundred K a purchase price of a property of 500 K. so fairly typical for any examples we give here, rent of $500 a week, so gross 5% interest rate of 3%.

Now, uh, Ed and I just offline before the show, uh, we're talking about us. We predict that, I say we because I wanted to have someone else blame this on if it doesn't happen, we predict that interest rates will be at the very most 3% in the next couple of months. We will probably see sub 3% interest rates, which is a pretty exciting time. Uh, then we've got rent.

So we always take out three weeks a year vacancy. So 49 weeks worth of rent is $24,500 then your usual expenses. So mortgage repayments or mortgage interest, sorry, $12,000 a year. 3% ...

Ed McKnight: On an interest only mortgage.

Andrew Nicol: ...interest only mortgage rates, three and a half, three two, insurance, 1500, maintenance, $500 a year, leasing fee, we're allowing that as an annual expense, even though, again, it's very much a unlikely to be an annual cost. So a weeks rent plus GST and property management of, of our usual six, six, 7% plus GST.

Ed McKnight: And on top of that, we've also got accounting at a, at a a thousand dollars plus GST. So at 1150 now, that takes us to a net cash position of $3,600, uh, annually. Now...

Andrew Nicol: That's in credit. That's making money.

Ed McKnight: That's cash flow. That's cash flow. So as a yield on the hundred thousand dollars deposit that you put it in, we're talking about a net yield of 3.6% now let's just compare that. That's pre-tax by the way.

Now let's just compare that to again, the ASB Westpac ANZ BNZ, we said there even before the OCR has fully been passed on because it usually takes about two days for the OCR to impact term deposit rates and be passed onto the floating rates, uh, where at least to become effective, we were talking about a 12 month term deposit rate of two to 2.6% and over here we're talking about standard brand new property don't even need to it renovate it with a potential net position of 3.6% so I think the, the crux of this, with this massive decrease in interest rates from the OCR and from the potential, uh, loosening of monetary policy, uh, we're going to see that property becomes much more attractive, not only just as, as a capital growth asset but as a yield asset as well.

Andrew Nicol: So no long-term listeners would find it hard to imagine, Ed enthusiastic. But before the show, he was a very, very excited about this spreadsheet had created. And actually, um, I just looked at it directly like I always do, and this is actually pretty amazing when you look at the numbers, the return that you get on your cash investment.

It's awesome, but then you've still got a half million dollar asset that you are receiving the capital growth on. So not only your 100 K but the 400 K that the bank gave you to invest. You're keeping all of that profit as well it is insane.

Ed McKnight: Interest and mortgage repayments are your largest expense as a landlord. These changes and small movements in the interest rate have big changes to your bottom line. So a 0.5% decrease in the interest rate on a $500,000 mortgage is $2,000 or sorry, on a $400,000 mortgage, cause we've got a hundred K cash deposit and here is a $2,000, uh, decrease in expenses.

Now that changes, like that small movement of 0.5 of a percent, and the interest rate changes your net position from $1,600, which is a 1.6% net yield to 3.6% net yield. Plus you get the capital growth on there. So at 1.6% net yield, you'd say, well, I could still make more money if that's all you were considering it. If all you were considering was the cash flow, you'd say, well, I'd still put it in the term deposit at the current rates before the OCR change has been passed on, but as soon as you have a, and that's ridiculous, a 0.5% change in the interest rate. Boom, it changes. Boom. It changes.

It changes to a significantly better net yield on your deposit, and you can get a much better deal in the property market, and that's why I believe we're going to see quite significant growth in the property market. We're going to see it as a bit of a safe haven.

We're seeing rents increase already from some of the regulation that's being introduced by the Labour government. Or, the Labour coalition government, I should say. Um, and so, so now with all of these changes, we're, we're seeing higher rents. We're seeing lower expenses.

Uh, I just saw that the deputy governor of the reserve bank as well said that he expects the retail banks to, to lend more into the market because they want to see more activity going on. They want to see more confidence. They want to see that increasing.

Andrew Nicol: And I, I know that, uh, with Coronavirus and everything being in the media, it's very scary for people. Uh, people get home and they see all this stuff that is bombarding us. Um, but there's money to be made when people are fearful. Uh, and so this is your opportunity to be brave. Uh, I saw a quote on Facebook today.

Someone asked, uh, in a property investors forum that I belong to, um, how much should I spend on an investment property? And, uh, the reply which I loved, was go to your broker. Find out how much you can borrow, borrow and spend that. Just go, go all in. Uh, put all your chips down because it's property, it always goes up in value.

Ed McKnight: Uh, over the long-term, over 10 to 15 years, disclaim it with the usual disclaimers that we give property as a long-term investment. But I, I really do see that this is a fantastic market to be operating in, and I know that we actually may attract a couple of a keyboard warriors by by saying these things, and we have already, because I always say that if we, once you see a market that has got a lot of confusion in it, once you see a market that's questioning itself and property, investors not really sure what's going on, that's the time to get in. That's the right time.

And I've said to some people, this is the moment you've been waiting for this is, this is the time to get in. And now that's that, uh, can attract a bit of a questioning glances side wards glances, I guess, uh, because people say, well, you know, there are some real issues that are happening with coronavirus that are, that are impacting society.

And that's absolutely true. I'm not, I'm not shying away from that, but what I am saying is that as a property investor this presents some opportunity for you. This decrease, the last time we saw a cut of this magnitude was a 50 basis point cut. So just 0.5 of a percent after the 2011 Canterbury earthquakes. So, you know, this is a massive cut, a massive, massive cut in the context of things, and it's time for property investors to get amongst and to take advantage of it.

Andrew Nicol: 100%

Ed McKnight: Let's wrap it up there, but, please don't forget to rate, review and subscribe to the show. It really does help us get the message out to more and more people. And hey, if you're interested in property investment, why don't check out our Instagram every second day we post a new carousel with a market update. Uh, we'll teach you something about property investment, whatever it happens to be, but they're very educational very interesting.

We are at Opes_partners, and I'm going to link to that in the show notes as well. So tap will swipe over the cover art, it'll take you straight there.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most of the New Zealand property market. Until next time.