#3 The property has bad cashflow

Good capital gains are only half the pie.

Property investors have to make sure they receive regular income (in the form of rent) which covers most costs of owning the asset.

So some property investors worry: “What if my property has bad cashflow?”

This could happen because the property doesn’t earn a high enough rent, or has high expenses. That could be an expensive body corporate or high maintenance costs.

How do I make sure I buy a property with good cashflow?

There are two ways you can guard against buying something with bad cashflow. The first is to know what yield you’re aiming for; the second is to make sure the numbers stack up.

#1 – Know what yield to aim for

The yield you should aim for depends on the properties you buy.

Let’s say you want to buy a growth property. That’s a property that increases in value more quickly, but it has a lower yield. 

Here at Opes we aim for a gross yield of 4 to 4.75% for this type of property (depending on location).

Compare that to a yield property. That’s one that has good cashflow, but grows in value more slowly. In that case, I aim for a 6% to 6.5% gross yield.

#2 – Run your numbers the right way

The second thing you can do is run your numbers the right way. 

This means doing a boatload of number crunching when eyeing up a new investment property.

You’ll need to consider things like the gross yield, the net yield, the property price and the current rent.

The best way to do this is using Opes+. This is free software you can use to run the numbers on your investment properties. 

It forecasts your cashflow so you can decide if you can afford to hold the property in the future.

#4 – There’s something wrong with the building

The next problem investors face is if there is something wrong with the building itself.

This can happen if the property was a leaky building or has bora or rot underneath the floors.

This can become an issue if the property then becomes structurally unsound. In that case, the property might not be habitable, so you can’t get a tenant. Or, in some cases, the value of the property might drop.

How do I avoid buying a troubled property?

Here are three ways you can best protect yourself against buying a property that has lots of issues.

#1 - Know what you are looking for

Properties built in the same decade tend to face the same issues. For instance, properties built before the 50s tend to have issues with electrical wiring.

Whereas those built in the 2000’s sometimes have issues with leaks or weather tightness.

#2 – Buy new

The second option is to buy a New Build. Newly-built homes comply with the most up-to-date building codes, so tend to avoid mistakes made with properties built in prior decades.

They also come with a 10-year builders’ warranty, so if there is something wrong with the property structurally you are covered by the warranty.

#3 – Get a builder’s report

Most investors who buy an existing property will also get a builder’s report. 

This shows you the issues about the building itself. This will either make you feel comfortable or it could give you cause for concern.

They usually cost around the $700 - $1,000, and are well worth it.

#5 – You get bad tenants

Many first-time investors are terrified they will get a bad tenant. You know, the sort who would feature on the show Renters.

The truth is there are bad tenants out there. 

There are tenants that pay the rent late (or not at all) and tenants who are anti-social and who’s behaviour will annoy and disturb neighbours.

This can have a real impact on your money if your tenants don’t pay rent or you need to repair the property.

To give you a sense of how often that happens, between 4% and 6% of properties go to the Tenancy Tribunal each year.

So, there’s about a 1 in 20 chance you will go to a tribunal in a given year.

If you’re in the market for 10 years, there is a 40% chance you have to deal with the Tenancy Tribunal at least once.

How do I make sure I don’t get a bad tenant?

Here’s our top 4 things to do to make sure you avoid bad tenants.

#1 – Make sure your property manager does a proper background check

The best way to steer clear of any potentially unruly tenants is to get your property manager to screen them properly.

For example, you want your property manager to conduct:

• A background check – where they call other property managers to make sure they are a good tenant
• Credit check – where they make sure the tenant doesn’t have unpaid bills to electricity companies or to any lenders
• Income checks – to make sure the tenant can afford the rent

These three checks will confirm your tenant can afford the rent and is of good character.

#2 – Invest in tenant-rich areas

You can be more choosy over tenants if you invest in an area where there is high rental demand.

Let’s say you invest in a place where there are lots of tenants like Addington in Christchurch. There are many tenants who live in Addington, so you are likely to find and choose a good tenant quickly.

On the other hand if you invest in a small town of 1,000 people, there are so few tenants you’ll likely be forced to choose the first one that comes along.

You can check how many tenants live in an area by using our Area Analyser tool. 

#3 – Invest in the right sort of properties

To get a good quality tenant you’ve got to buy the sort of property they want to live in. If you only buy old, run-down, cold properties, you are going to attract a certain type of tenant.

But if you purchase a better maintained or New Build property, you are likely to attract a premium tenant.

This is one of the reasons here at Opes Partners we tend to recommend New Builds because they tend to attract low-hassle tenants.

#4 – Get landlord’s insurance

If the worst comes to the worst, your final safety net can be landlord’s insurance.

This means if your tenants do consume the wrong type of substance (meth) in your property, damage appliances, or maliciously damage your property, the insurance company will cover the cost of what you’ve lost.

#6 – You take on too much debt

Mortgages are expensive.

But if you want to buy a few investment properties you probably will take on quite a bit of debt.

If you think about it, an investor with 3 to 4 properties will have more assets than most small businesses in New Zealand.

Many Auckland properties are worth over a million dollars. So if you have 4 properties, you might have $3-4 million worth of debt … that’s a decent-sized business.

But not everyone should keep taking on more and more debt.

If you’re an older Kiwis, who doesn’t have long before retirement, you probably shouldn’t take on a mega-mortgage. You might have to sell that property when your income drops if you stop working.

What do I do if I’m not sure about how much debt I’m taking on?

If you want to make sure that you’re taking on the right amount of debt for you it’s best to speak to a financial adviser or mortgage broker about your personal situation.

#7 – You lose your job

Nobody plans to be made redundant, or have their business fall over, but it does happen.

Earthquakes, Covid-19, an accident at work … these could all stop you earning.

This is a problem for investors when property is negatively-geared. That means the rent coming in doesn’t pay for all the property’s costs, so the investor has to top up the bank account.

If you then lose your job, this could become a struggle. And the other issue with property is that it is an illiquid asset – it takes time to sell. That means you can’t get rid of it quickly if you do face tough financial times.

What do I do if I lose my job?

Here are 2 things you can do if the worst-case scenario happens.

#1 – Revolving credit

A classic strategy investors use is to set up a revolving credit. This is like a big overdraft secured against your home.

So, let’s say you set up a $50,000 revolving credit – and you don’t spend any of the money. If you then lose your job, you have a $50,000 line of credit you can use if cash is tight.

But, you MUST set this up before you lose your job. If you try to do it once you’ve lost your job, there’s little chance you’ll get the lending approved.

#2 – Income protection insurance

The second option is income protection insurance. This is where if you are unable to work (temporarily or permanently) an insurance company will pay you a portion of your salary.

This means if you can’t work, you still earn a living.

#8 – Ever-changing regulations

Property investment regulations constantly change. 

Not only does that impact how easy it is to get a mortgage, you could also get taxed more.

In the last few years property investors have faced:

• The introduction and roll back of Interest Deductibility
• A tougher (and now easier) lending environment through CCCFA changes
• New Debt-to-Income Ratios
• Changing deposits required through LVRs

These rule changes can feel intimidating. And you can bet that these regulations are likely to change again in the future.

How do I keep on top of all these changes?

If you enter investing with the mindset that rules will change you’re off to a good start; it does no good to be spooked by them.

Rather, you want to work with the changes and inform yourself on how best you can still achieve your goals.

You don’t need to become a tax expert or mortgage broker either, but you do need a team of professionals around you who can help you respond to all of these changes.

So … should I start investing in property?

Phew! We hear you – there really are a lot of things that can go wrong.

But, while there are things that can go wrong, it’s highly unlikely everything will go wrong. 

If you invest in property the right way you probably won’t buy a property that immediately falls in value, has bad tenants, and turns out to be leaky, all while you lose your job.

This list isn’t to scare you, or make you think property investment can’t work. After all, here at Opes Partners we are a property investment business.

No, this list is to help you become a better property investor. Because if you understand what can go wrong, you’ve got a much better chance of making sure these things don’t happen.