Five years ago attendance at Auckland Property Investors' Association monthly meetings numbered as few as 150. Fast forward to 2015 and up to 400 people are crowding in to learn how to be investors. "We're putting on better speakers," says association president Andrew Bruce. "But let's face it, the increased numbers are a reflection of the market."
As with many bull runs, newbies didn't get in when the prices were depressed after the financial crisis. They waited until the Auckland market had been rising steadily for a good four years before they were ready to get a slice of the riches they saw others gaining.
Mortgage brokers and lenders have seen this resurgence in property investment. Loan Market broker Bruce Patten began noticing an upsurge in new property investors looking for loans at the beginning of this year.
Many of the new investors pray for capital gains and are willing to saddle themselves with debt and top-up mortgages with that end in mind. The rent on the majority of properties they are buying won't pay the mortgage and other costs.
Yields are the figures that long-term investors look at when deciding whether to buy. Gross yield is the percentage of rental income for the purchase price and is based on the median value and median rent for a town, city or suburb. Net yields are the same figures, but after expenses such as the mortgage, insurance and maintenance.
In Epsom, the gross yield is sitting at about 1.5 per cent, according to QV, and 2-3 per cent isn't uncommon in other suburbs. That's only enough rent to cover about a third of the monthly mortgage payment. "It's dopey," says seasoned property investor Olly Newland.
The lowest gross yield Newland says he would buy on is 5-6 per cent.
Low yields can be indicative of a market that's nearing a peak. As Bruce points out, it becomes hard to find neutral cashflow properties towards the top of any property price cycle. Investors such as him have their hands in their pockets for this reason.
The gross yield nationwide is 4.3 per cent. In the downtown Auckland apartment market, gross yields are 6.8 per cent, although costs are higher thanks to body corporate fees and, in some cases, ground rent.
Some Auckland investors are looking out of the city for better yields, although mostly in Hamilton and Tauranga, says Patten. Invercargill's suburbs have gross yields of 6.2 per cent according to QV. In the Highbury/Westbrook area of Palmerston North, investors can expect a yield of about 7.3 per cent.
The property markets in these towns haven't had the stratospheric rises of Auckland, which means they're less likely to suffer falls, although no one can guarantee that.
Investing out of town does add other risks. Real estate agents, bless them, love the idea of palming off the dross to out-of-towners, who may not know that this street or that building is highly undesirable. Stories of out-of-town investors buying the neighbouring property to a gang or tinny house abound.
Auckland's property investment market has other things going against it. It's propped up by overseas buyers who aren't resident here. These owners may be subject to economic forces in their own countries, which could have a significant impact on Auckland house prices.
The idea of the 5Ds of property investing stemmed from a talk that property manager Jackie Thomas-Teague at Rental Results gave to the Wellington Property Investors' Association last month. Thomas-Teague had 4Ds. I've added "debt" to the list, which includes mortgage debt and debt owed by tenants who have fallen behind in rent.
What the list tells you is that the day-to-day reality of property investing isn't as glamorous as it's made out to be.
Yet it can pay off if you go in with your eyes open. Buying at the top of the market is one risk that many of the latest crop of investors will fall prey to. No market goes up forever.
That's not all bad, however. Even if you buy at the top of the market and it falls, you will make a capital gain if you can hang on for long enough. Eventually, prices will rise again. It's best to be counter-cyclical, says Bruce. But if you can't time the market right then time in the market will heal.
One risk is thinking you're a wunderkind because you bought last year and your property has increased by 20 per cent. This can lead to mistakes you wouldn't make if you'd been through the washer of an entire property cycle.
Another risk is debt. If the value of your properties falls below the value of the mortgage, the bank can call the debt in.
Typically banks don't do this, says Patten, if loan payments are up to date. "I had a client who was 130 per cent geared after the financial crisis. The loans were not called in."
Unforeseen events can happen in any investment market. The Reserve Bank could use its macro-prudential tools, for example, to indirectly force lenders to call in mortgages where there is negative equity.
New investors often fail to factor in interest rate rises. Present rates are at about 4.5 per cent. Any sensible investor, however, would be doing their sums on about 7.5 per cent, says Patten. If they can afford to pay the mortgage at that level they will be able to ride out the eventual increase in rates.
Another reason Auckland may not be the place for new investors is that restrictions make it harder to buy there than elsewhere for some borrowers. Since the start of this month, Auckland buyers have needed a 30 per cent deposit to get a bank loan. This restriction doesn't apply to non-bank lenders such as Resimac and General Finance. Elsewhere, investors need to put up 15 per cent of the property value through a cash deposit or leveraging other property.
