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11 May 2021

Why invest in property? Extract from Property Investment in New Zealand. A strategy for wealth.

Many people start off in property investment because they have some spare cash, perhaps from their savings or their business.
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Why invest in Property? Author Martin Hawes

Many people start off in property investment because they have some spare cash, perhaps from their savings or their business. They look around for an investment, knowing that they ought to be able to do much better than simply leaving their money in the bank to accrue interest.

Rental property provides both an income and a hedge against inflation. The income is useful insofar as you can spend it, save it or (as is most likely) use it to cover your mortgage payments. The cash return from the property is likely to be better than what you would get from putting your money in the bank. Although inflation is now controlled in New Zealand by the Reserve Back Act, I doubt that it will ever be eradicated. Even an inflation rate of 2% per annum (while not as disastrous as our previous 10%-15%) whittles away at savings. Property that is well located and well maintained has always held its value compared with inflation, and indeed some studies have shown that it goes up in value over inflation. Even with an inflation rate of 2%, good property that is well managed should see growth in real value of around 3%-5%, and quite probably considerably more.

Whether you are a small investor looking for somewhere to put your savings or someone trying to build up a major portfolio, you need a clear focus on good rental property whose value is underpinned by a proper economic cash return.

Property is an investment for people who:

  1. Want capital growth rather than cash income. If you buy property without any borrowings you will get quite a high cash return but a relatively low capital gain. Most property investors gear up their property somewhat by borrowing, which cuts down the cash return (because some of the cash income is applied to paying interest) but increases the capital gain.
  2. Don’t mind waiting for their return. Property investment is for the long term; you may not get an instant increase in value (as sometimes can happen with shares). You should be looking instead for solid long-term growth over years and decades.
  3. Do not like to carry much risk. While property investment can be risky for people who purchase lower -quality properties with very high borrowings, for most people property investment is relatively low-risk. Nevertheless, most people going into property investment will need to feel comfortable borrowing from a bank or finance house to fund their purchase. If you do not like risk (or have an aversion to borrowing) you may still want to invest in property but you should buy only the very best quality property and probably pay cash for it.
  4. Have some interpersonal skills. Property investors need to be good negotiators if they wish to maximise their return. There are a few who do not negotiate much (and over long periods of time their investments will still serve them well), but those wishing to maximise their return will need to be top negotiators.
  5. Have some spare time. Property investment in the early stages is very time-consuming. Buying a property involves looking at many different properties, selecting one, negotiating to purchase it, negotiating finance, appointing valuers etc. Some properties, particularly flats, also require considerable time in management. There are, however, other properties which, once you have bought them, require very little of your time for months on end.