When it comes to property management and investing, buying, holding or selling are complex decisions.
There is no right answer to every situation so whenever you are faced with this dilemma, you should take into consideration a couple of key factors.
REAL ESTATE INVESTMENTS
Before we dive into the details of the pros and cons of buying or holding a property, let’s do a recap of what property investing is.
According to Investopedia, real estate ownership has become one of the top investments around the globe. It can be compared to the food industry: ever-changing, but always in demand.
Yes, the markets may sway from one location to another, but these should be watched out for by the investor. For example, buyers in Auckland may increase during 2018 because of new investments and job openings in the area. On the other hand, there may be a “drought” in the sales because of low economic downturn of the nation as a whole.
Nonetheless, real estate investment will always be a key player in the market.
PROPERTY INVESTMENT & RISKS
As a property investor, buying and holding can be considered like a “mantra,” according to Diana Clement from New Zealand Herald. Not all properties are meant to stay with you forever, or else, it wouldn’t be called an investment in the first place. What an investment does is it provides you with an asset.
However, all investments have underlying risks. Just as what Andrew King, executive officer of the New Zealand Property Investors Federation (NZPIF) has said, properties that are not tended to can become “problem children.”
King speaks from experience. He said that he used to have a “problem child” before, located on the Great North Rd. in Waterview. The rental property was supposed to cater to international students, but his investment was affected by the unexpected drop of students around the area. With lodgers getting harder and harder to find, King was faced with the question of whether to sell it or hold onto it.
The market change was not his only problem. For rental properties to stay afloat, the tenants are a big factor. They should be willing to stay on longer terms and are capable of paying on time. With students as his target demographic, this has become a challenge.
“It was on a main road and it didn’t have a lot of living space,” says King. “The layout was awkward and it turned over quite frequently. It just never seemed to work.”
Ultimately, King decided to sell off this property and move forward to owning a RoomMate Cabins franchise. Of course, with franchises, the systems are already embedded in the company. There’s no need to create or invent a structure from the ground up.
There are multiple risks in handling a property, but there are different ways to balance or battle these risks. It is also good to know when to go out of the property before it completely falls through and when to stay to see if the investment can be given another chance.
THE MATH BEHIND GOOD DECISIONS
All businesses are backed by numbers. We can use Mr. King’s story as a cautionary tale. It’s either he held on his property too long or just lacked the necessary systems to maintain his rental property. Either way, we can track that in the math.
Daimien Patterson from the Integrity Property Investor Services notes that each real estate investor should do their math whenever they’re assessing a decision for their property; whether it is better to buy or to hold.
When investing in property, two costs to think about. The acquisition costs, how much of your money will you have to put in upfront, and then holding costs, how much money will you have to put in week to week to hold onto it…If you are going to end up in front go for it, if you are going to end up behind, seriously reconsider buying that property as you can only own so many properties where you have to chip in the balance of the funds.
So, to understand what it takes to maintain a property, let’s look at the costs.
First off, there’s the stamp duty which could be around NZ$ 20,000 that is paid off when acquiring the property. Legal is also a part of the equation. This could go from NZ$ 500 to NZ$ 2,000, depending on the property and deal types. Multiple layers of inspections are also needed to make sure you can account for the original state of the property before buying and before using it as a rental space. Once the inspections are done, the fixtures are also needed because as a lessor, you are responsible for your tenants’ well-being inside the compound.
Now, these are all expenses for the physical property itself. Let’s take a look at the costs for the banks and the calculation for your profit or ROI (return on investment).
It depends on your agreement with the property owner (if you’re buying), but most properties need around 10 percent deposit. On top of that, you also need to calculate how much the mortgage insurance is. Banks usually have a healthier mortgage insurance for those who are loaning less than 80 percent of the property price.
Next, we go to the rent. How much are you going to rent the property? Of course, to get the best price, you need to take a look at the location’s competitiveness in the market. You can’t ask for too high of a price, especially if your property does not fall under the high lux category, or else people won’t come. You have to space out the rental over at least 5 year time period. At the same time, you can balance it with your monthly loan payment to the bank.
To sum it up, you need to look at your property numbers this way:
Rent + Tax Return
= Will I be behind or in front after tax?
If the end result is a relatively positive number, then it’s a good sign you’re on the right track. If you’ve done your numbers and you’re comfortable with how it looks like, then you can decide to hold the property and maintain it as a rental investment.
RISKS & HOW TO AVOID THEM
As mentioned above, just like any other business or investment, real estate management has its own risk. Going back to Mr. King’s example, we can consider this as a problem with the management.
King was probably overseeing the operations of this rental property on his own. However, this task may not be suited for all real estate investors.
Amanda Watt, specialist property accountant from Crowe Howath, agrees. Watt says that most investors need to take a step back and let someone manage their properties since management is not an easy task.
Property managers do not only focus on getting the payments on time, they also need to allot resources for inspections, legal and accounting. All of these responsibilities can be challenging for investors who also have other jobs or other projects in line.
Watt herself is a property investor. In her experience, it was easier to maintain her investments with a partner or a property manager.
“I didn’t want to know what the tenants were doing,” says Watt.
Another real estate expert, Paul Foster of Iron Bridge Real Estate, supports the notion of having a property manager. It takes a lot of work to make a rental property profitable, including the dealings with the tenants as well as the local council.
Though hiring a property manager is one of the top priorities of real estate investors, this is not the only key to success.
Going back to King’s example, they were unable to anticipate the decline of their original target market: international students in the area. This then resulted in a massive downturn for their monthly profits—one of the major reasons King sold off the property.
However, this could have been prevented by having a strong marketing personnel. Why marketing? If the physical location is a selling point in itself, why do we need to hire marketing to create an upstream of profit from our investments?
It’s because properties are also brands.
King’s rental property has been ideally located near schools so it organically attracted their target audience. However, the market is somewhat unpredictable. If King has a good marketing personnel, even before there was a drop of international students in town, they could have prevented the downward turn of profit by advertising the place as a rental place for international workers as well while taking advantage of their cultural diversity.
They could have built a brand out of the rental space and made is a space not only for students, but also for other international workers in the local area. It would also be an advantage for King to get professionals in the rental property since, just as mentioned in the first part of the article, the value of the tenants are also precedent for a property’s success.
If they attracted workers who would ideally have more stable jobs and longer terms, they will have a stronger cash flow every month.
Rental properties will always be an ideal investment. However, there are different key factors to keep in mind if you’re deciding to hold or sell or buy.
First off, look at the property value. Are the numbers adding up? Is the initial investment worth it in 5 years’ time? Can the rent cover up the monthly loan and tax payment? Will it provide you a positive income stream?
Next is you have to know if this should be a passive or active income. If you are passionate about the location, you can manage it on your own. However, property management is a tedious job. It involves accounting, sales, dealing with the legalities of the property as well as taking care of the tenants. Not everyone is hard-wired for managing properties. Just like Watt, you need to know if it will be the best decision to manage the property yourself, or add in a property management to your payroll to increase the sustainability of your real estate investment.
The next thing is to be aware of the trends and to catch up to them. If there’s a group of people going out of town in a season every year, you may want to provide a stronger branding for your property to let other renters know you will be a good fit for them.
Months without tenants can be inevitable, but it doesn’t mean you should give up reaching out to other renters. It is possible that there are others out there who are looking for just the perfect place, but they don’t see your property as a “culture fit” for them. To avoid losing potential customers, make sure you invest in the marketing and branding of your property.
This decision also comes down to you. You can keep this on your yearly payroll so you have an all-year-round personnel who will be able to actively mark trends or you can outsource it to an agency from time to time, only when you feel there’s a need to.
Lastly, know when to give up. There are instances where the market can no longer boost your property. If you have tried everything that we talked about above and unfortunate circumstances keep on happening, you will only continue to burn cash. Your decision to hold a property may become damaging for others. Instead of saving the property and the staff and giving another property owner the opportunity to convert your initial project into a vision of their own, your indecision on how to move forward can be more of an error than a learning opportunity.
Real estate investment is challenging and rewarding at the same time. Just as what was written above, there really is no perfect answer since each situation would be different from the other. The main point is to study it from different angles and understand the losses and opportunities of the decisions you will have.