Another letter on rental property

Q: As an expat Kiwi living in London, I thought you might like an international perspective.

First, although I own a number of rental properties, I could not agree more with your ideas on the NZ rental market.

Yields are low, capital growth is not great and legislation unhelpful to landlords.

There is an investment bubble in UK property now, and I have fixed my mortgage payments and acquired long-term corporate leases, paying off my debt fast.

When the bubble bursts there will be a lot of unhappy people.

The golden rule - that the rent needs to exceed 1.4 times the interest component of the mortgage, to ensure positive cash flow month on month - has served me well.

(This rule guarantees, almost, that you make money through voids, downturns, interest rate hikes etc. If a deal fails this test, then you have to find ways to make it pass; ie, make a lower offer or sign tenants for long-term leases to reduce voids etc. Generally, though, if it fails you go elsewhere. You can always find a good deal if you put the hours in.)

I would, however, suggest an exception to your argument, which is the "development investor".

There are lots of New Zealand properties that are worth buying and doing up for rent or sale.

My father did this through the 1970s and 1980s (before the boom) and it really set my family up. It only works if you are a DIY guru though (unlike me).

Second, I do have to question your diversification argument.

I have an MBA, so I know the research, but you assume one thing that is often not true, equal knowledge between asset types.

I know nothing about the stockmarket, so I stay out of active investing because my pension and other investments (over which I have no control) are tied to it anyhow.

I know a lot about property, options, teaching and business development, so I make my money in these sectors.

I'm not diversified that much, but rather that than get into areas that I (and the majority of advisers it has to be said) don't know anything about.

After experience in different asset types I feel that you need to work to your strengths.

I look forward to seeing who is proved right in your debate with the property investors. I have my money on you!

A: Not another too-long letter on rental property!

But I'm printing it because mainly you agree with ... oops, I mean because you raise some new and interesting points.

Thanks for the golden rule. That could be useful for others.

And "development investors" - who are quite a separate breed from most landlords - do, indeed, often do well.

The clever ones follow the rules: looking for superficially unattractive properties; picking the worst house in a good street; seeking out desperate sellers who will slash their price, and so on.

And they know how to make a house look much better without spending many thousands.

It's important, though, to take into account the time they put in. I suspect you have to be pretty skilled and also enjoy that sort of work to make it all worthwhile.

Note, too, that your father's experience is unlikely to be repeated. During the 1970s and early 1980s, inflation was often above 15 per cent.

It was a period when you couldn't go wrong borrowing to invest in housing.

That's no longer true, now that inflation is much lower.

As for diversification, you say you stay out of active investment in shares because you don't know about the stockmarket.

That makes sense. But the wonderful thing about share investment is that you can go into a share fund with no knowledge and may do even better than those who know heaps.

Sure, you have to pay fees to cover the costs of professional management. But you gain from the broad diversification and benefit from the lower brokerage and other lower costs that big traders pay.

If you choose a fund that charges relatively low fees - index funds are good examples - it can be an excellent investment, even if you don't know what a dividend is.

A final comment on my "debate" with property investors: Nobody will ever be proved right.

We haven't set a judgment date. Even if we had, it's not clear how we would measure performance.

But isn't it great for all of us to consider others' viewpoints every now and then? I certainly learn heaps from those who disagree with me. (Fade to a sunset on a beach, and violins playing.)

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or maryh@pl.net

Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.