There are ways and means of structuring your debt to minimize the interest rate risk Von. We are all about covering off as much risk as possible. Its not so much the interest rate on each loan we worry about, its more important to make sure that the terms of your loans are set so that only a portion of your total debt comes up to the whim of the market at any one time. IE. stagger the fixed term expiry dates of your mortgages.

And we keep an eye on our average interest rate across all of our debt.

Also doing proper financial analysis and forecasting before committing to each property purchase, by allowing contingencys for interest rate rises, and making sure the portfolio as a whole can sustain those. Starting out by purchasing properties with strong positive cash flow yields also helps a great deal.

Well said Graeme,

The same correlation of yield to value also exists with residential properties where they are only suitable as an investment property. Ie. A block of units on one title. Where they will only ever be sold to an investor. I.e. Comparative sales of other homes never come into determining the value, but more the comparative cap rate (yield) that other similar properties have sold on.

This is the type of property i like to buy. As i find it very easy to manufacture capital growth, by purchasing a under rented block of 10 units for example, then lift the rents to market level, and when that is capitalised at say 7.5%-8% that creates a huge amount of value, hundreds of thousands of dollars. In most cases i dont even have to renovate to get these increased rent levels. Just have to look out for under let blocks of units.

Some times, you can get a double wammy, when the vendor/agent is selling the property on a cap rate that they believe is the market accepted yield, but in actual fact properties are selling on lower yields. So if i buy under rented on a say an 8.25% cap rate. But i can get another $400pw rent in total over all units and the valuer will use say an 7.7% cap rate, i have just created $318,000 of instant capital growth. (this is an actual example of a block of 10 units i have purchased).

@von Krumm, Do we really care if the market comes back by 5-10% when we have just bought 30% below value This is one reason why I believe buying below value is soooo important, it gives us extra safety margins on many fronts.

With normal homes (that could be purchased as a home, or as a rental property) the value of these properties is generally based off recent sales of other similar properties, and has nothing to do with what it rents for. Therefore no correlation of value to rental income. What normally happens thru normal market forces of supply and demand, is values will move up with demand, rent will lag behind but will eventually move up as well, then as rents move upwards, values are normally static, then values will move again and so on, and this keeps on going in a sea-saw type effect.

You can see why i love the blocks of units, as it is so much more like commercial property. Once you understand cap rates, and value determined by rental income, you are able to spot some great opportunities.

@ Graeme, over the years here in NZ i have seen many kiwis with the same DIY attitude, that think all they have to do is buy any old property and do some reno work and they will automatically make money. As we know, it doesn’t work like that. But its more about the proper due diligence to determine final value (after reno) and working out an accurate reno budget. Most people seem to over estimate final selling price, and well under estimate reno and holding costs.

Same old story, most people that make mistakes or come to grief is due to jumping in before they get educated and fully understand everything involved.

Hi TB,

From our experience with our Aussie based clients, the lending criteria does vary quite a bit from bank to bank at the moment for Australian citizens purchasing property here in NZ.

Some are only able to get 70% finance on purchase, others are getting 80%. Some banks rejected the applications on the basis that the client had no other equity/security here in NZ, which is completely bizarre, as as soon as they purchase the property they then have assets/security here, as well as a income stream here. Moral of the story, all banks have different lending criteria, that do change quite often, and are very client specific too.

We are referring our clients to a couple of really good brokers, who are very experienced with securing finance in NZ for offshore purchasers.

But all in all, finance is certainly available to Aussie citizens buying investment property here in NZ. About half of all of the property deals we pass on to clients go to Aussies at the moment.

I have had several emails from people off the forum asking about the type of deals we are finding here in NZ currently and passing onto our clients.

So for the benefit of others that may also be wondering, here are the numbers from two properties that we have passed onto two different Aussie based clients in the last 10 days.

Prop 1
3 bedroom brick standalone home, very good condition, 736 sqm freehold section
$132k Purchase Price
$160k Registered Valuation (this property had a valuation of $210k at the peak of the market in 2007)
17.5% discount below Value
$28k immediate equity gain
Rent $250 pw
9.85% Gross Yield
Pretax cashflow $2,020p.a. (at 100% finance)

Prop 2
Small 4 bedroom standalone home, minor cosmetic tidy up beneficial, 735 sqm freehold section
$97k Purchase price
$125k valuation
22.4% discount below valuation
$28k immediate equity gain
Rent $235 pw
12.6% Gross yield
Pretax cashflow $3,415p.a. (at 100% finance)

Both good sound properties and are in the same reasonable sized town (20,000 population) with the main State Highway 1 passing through it.

We are currently focusing on these lower priced properties, as this is what the majority of our clients are saying they want to buy, with both good discounts and pre tax positive cashflow.

Hi Primrose,

It is Cash Flow Positive Properties. Which is a property that generates enough rental income to cover all costs of owning (including mortgage payments) and there is a surplus rental income left over, so in other words, a property that pays you a passive income to own it, even when financed at 100% of the purchase price.

Hi Packer,

No such thing as a stupid question CF refers to Cash-flow. And when we talk about CF+ or Positive Cash-flow property, we are meaning an investment property generates enough rental income to cover all of the expenses you have as the owner to own it, including the loan payments. Even when 100% of the purchase price is funding via a mortgage.

The amount of rental income that is surplus after paying all the ownerships costs, is the amount of positive cashflow the property generates. We normally are focussed on pre-tax cash-flow, ie. Not factoring in tax credits, as you generally dont get those until the end of the tax year.

Hope that helps.

More great advice, buy and hold property investing is all about controlling as large an asset base as possible for as long as possible.

Hey quick chick, i think you will find it is far worse than that. It appears that both units rent for a total of $390per week.

Just a quick update on the Market here in NZ.

Many investors have been holding off, sitting on their hands for the last few months, waiting to see what our GOVT sprung on us in the way of proposed changes to the tax rules on rental property. There were a few nasty proposals being thrown around, IE the introduction of a capital gains tax, or the outright ring fencing of tax losses and the investor loosing the ability to offset these against personal income.

Well, the GOVT delivered the budget last Thursday, and they were actually reasonably friendly towards us property investors.

They did not introduce Capital gains tax, and did not stop investors being able to claim losses etc. I have written an in-depth blog about the changes in the budget, and how they will effect investors and the overall property market – Read the blog post here

All in all I think it was a great budget, and the heavy cuts across the board to the personal tax rates, along with the surprise cut of the company tax rate is certainly aimed at creating economic stimulus for New Zealand. Which can only be a great thing for the property market and the Country as a whole.

I think the general consensus is that the playing field for us property investors hasn't been effected greatly, and we are seeing local investors step back into the market already.

There are still some great deals around at present (we are certainly putting a few excellent pre-tax cash flow positive deals together currently, and they are getting snapped up fast by our clients both here in NZ and in Australia) However with the budget now behind us, and investors now having the certainly of knowing what the changes actually are, I don't think these great deals are going to be around for that long, as investor activity picks up once again.

Our last deal was a 3 bed home, that we secured at 2/3rds its market value, and was showing a 13% gross yield – Not surprisingly it was snapped up by the first person to contact us about it.

The time to be buying is NOW, before the market picks back up again.

Happy Investing

KPG

Further to my post above about blocks of units.

Dont be put off by thinking "Thats alright for you, but i wont be able to afford to buy a whole block of units"

My very first multi unit deal was a block of 4 x 2 bedroomed units in Rotorua NZ, that i purchased for $225,000 all up back in 2002.

I bought them sight unseen. In fact i was living in the south Island at the time, and i owned them for 1 year before i eventually visited them. – I still own them today.