Property Investment

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Never do this with your investment property…

The irony of property investing is that you can use property investment for emotional reasons, but you can’t let emotions get in the way of what you invest in. In this article, you’ll learn the four things you should never do with an investment property.

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The irony of property investing is that you can use property investment for emotional reasons, but you can’t let emotions get in the way of what you invest in.

While you might invest in property to secure your dream retirement, or help your kids through university, you can’t let those dreams bleed into your investment decision.

This is a classic mistake beginner investors make.

In this article, you’ll learn the four things you should never do with an investment property.

#1 – Plan To Move Into Your Investment

Some investors get caught into the trap of thinking – “Let’s buy this property now, because we plan to move there in a few years”.

For instance, Ken and Jenny like the idea of moving to Queenstown in a few years.

They think it’s a good idea to buy their future property now – instead of waiting 2 years – before house prices go up.

Now, Ken and Jenny are right to think house prices could rise – it’s likely they will. But this doesn’t mean it’s the right decision for them to buy this property now if they want to grow their wealth.

The reason is that over the next 2 years they’ll likely rent it out to help cover the mortgage.

However, this property may not be a good rental property.

Property investment donts

Because Ken and Jenny plan to live there, they might opt for a more highly-specced property. These types of properties tend to earn lower yields and have poorer cashflow.

Remember, a higher price for a more highly-specced property doesn’t equate to a higher rent. At best, these finer, more expensive details go unnoticed by tenants. At worst, they work against you as they end up costing you more to replace when hard-wearing tenants break them.

What’s the alternative?

Buy an investment property today in an area that is also likely to grow in value. But, buy a property with better cashflow. When it’s time to move, Ken and Jenny should sell their current home and buy in Queenstown.

Not only will this help cashflow, it also guards against the risk that their personal circumstances might change over time. For instance, if they start a family.

The key message here is investment properties and the homes you live in are two completely different kettles of fish.

Once you start muddying your investment-searching waters, you can start to lose sight of what makes a good investment property. And this could mean you miss out on buying something better.

#2 – Plan To Use It For Your Kids

Inter-generational wealth is a big motivator for investors who are also parents.

However, it can be a dangerous trap to fall into when you start thinking: “I’ll buy this property for my children to live in, while they go to university”.

For example, let’s say Hamilton parents Jenny and Dave and have twin daughters, 16, who are planning to attend Auckland University after they graduate from high school.

They think, “Let’s buy a central city apartment for the girls to live in while they study”.

Property investment donts

This way Jenny and Dave figure they will be saving their kids having to juggle work with study, and can concentrate more on their education.

But your children’s future university accommodation isn’t something you should be considering in an investment.

This is because once you hinge your investment decision on this, you could end up buying a property based on their requirements, rather than what makes a good investment.

For instance, an apartment isn’t the best choice for a long-term property investor who wants to grow their wealth. That’s because apartments increase in value much slower than houses and townhouses.

Not only that, if Jenny and Dave decide to buy an apartment for their daughters to live in, they will have to make principal + interest repayments on that apartment as well as the mortgage on their own home. Whereas they could likely get an interest-only mortgage on an investment property. That means cashflow on an investment property will likely be better than purchasing a property for their children.

Property investment donts

So how could the couple help their children and make a good long-term financial decision?

Firstly, they might purchase a 2-bed townhouse in South or West Auckland, which is where we recommend properties to investors in our largest city.

These sorts of investments have strong rental prospects and strong potential for future capital growth.

However, this is the sort of property their daughters might not want to live in while going to university, since there is a commute to the city.

After that Jenny and Dave can still help their children attend university, either by paying or subsidising their daughters’ rent if they were going to allow their kids to live rent-free anyway.

It will likely cost them the same but they will be in a better long-term financial position.

#3 – Plan To Use It For Retirement

Property investment can often help you sort your retirement – it might even be one of the biggest drivers for investing.

But this doesn’t mean you *literally* buy your future retirement home.

For instance, let’s say Bob and Mabel dream of moving to Tangoio Beach, Hawke’s Bay, when they retire in 10 years.

So, they think they’ll buy now to get in quick before house prices go up. But there are risks to operating a plan like this.

For instance, if you want to retire in a small area it likely won’t have the best capital growth. Similarly, there may not be a lot of demand for rental properties.

Property investment donts

This could mean cashflow and capital growth are worse than if you just bought a good quality rental property.

Even if you do manage to get tenants, there will also be natural wear and tear in the property over time. So, you’re taking a bit of a gamble on what your future retirement home will look like in 10 years’ time, whereas if you buy it right before you live in it you’ll be confident about the state of the property when it’s time to move in.

A better option for Mabel and Bob is to buy the right investment property now. Then, in 10 years buy their dream seaside home.

Yes, the prices will (most likely) have gone up in that 10-year period, but if Mabel and Bob buy an investment property elsewhere, that will have gone up even more and they will be better off.

#4 – Plan To Use It For A Holiday Home

As tempting as it can be to buy an investment property that doubles as a holiday home – it’s not a good idea to confuse the two.

Why? Once you start looking at potential investments through the lens of: “Will this be a holiday home for me in the future” – it can skew you in the wrong direction.

For instance, let’s say Steph and Bayley treasure their fishing holidays on the Karikari Peninsula in Northland.

It’s quiet, it’s warm, there’s no traffic and it’s removed from the fast-pace of the city where they work.

With this in mind it’s really unlikely Steph and Bayley are going to want their future holiday home to be in Rolleston, Selwyn District, or South Auckland.

These are places we, here at Opes Partners, often recommend as good investment locations because:

  • They are currently undervalued
  • Have strong future potential in terms of economy and population growth
  • Have good rental demand

Great for investment, but they might not have Steph and Bayley’s favourite fishing spot.

Holiday homes are much more difficult to rent in the off-season months, which mean your investment cashflow will suffer. And with fewer residents wanting to buy properties, the resale value will also likely suffer.

Instead, a better idea is to separate the two ideas.

First, buy that good long-term investment property in Rolleston; then use Airbnb as your ideal holiday home in sunny Northland when you need it.

Don’t Settle Or Compromise

This article isn’t about us telling you what to do, or “telling you off” for wanting all these things.

Rather, the key message here is: Don’t compromise.

Don’t buy something that’s kind of an investment and kind of a place to retire. You’re muddying the buying criteria.

Instead, buy a good investment when it’s time to grow your wealth. Then, when it’s time to retire, use the equity in that investment to buy your ideal retirement home. That way you give yourself both.

Focussing on only choosing a good investment takes the emotion out of it. That way you can make your decision based on the numbers.

The benefit of this is, once you do have those smart investments set up, all the things you really want (the holiday home, the nice retirement, looking after your kids) you can do as well.

Laine 3 001

Laine Moger

Journalist and Property Educator, holds a Bachelor of Communication (Honours) from Massey University.

Laine Moger, a seasoned Journalist and Property Educator with six years of experience, holds a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism. She has been an integral part of the Opes team for two years, crafting content for our website, newsletter, and external columns, as well as contributing to Informed Investor and NZ Property Investor.

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