Diana Clement: Finding a niche in the market

Novice property investors often give little thought to specialising, when it comes to buying investment property.

Yet like any business, focusing on a niche and knowing your market should pay dividends. That might be blocks of flats, a geographic location, or a type of tenant such as students, or itinerant workers.

Says Andrew King, president of the Auckland Property Investors' Association (APIA): "It is very much like a company niche marketing to a particular client base. The business succeeds because they know what product to provide and innovative ways to provide it."

Many investors find a niche and stick to their knitting, because it works for them. Investor Lee Whiley, for example, has done handsomely from student lets in the Arch Hill area of Auckland over the past decade. He's able to do his due diligence on potential properties in the area, more or less at a glance. But when he branched out and bought an apartment in nearby Ponsonby, it let him down financially.

None the less once a winner doesn't mean always a winner and investors do need to be able to metamorphose as market segments become oversupplied or new opportunities open up. The property cycle also takes its toll on certain styles of investing.

King, for example, has for a long time specialised in student accommodation in Waterview near Unitec. Recently the returns on his properties have fallen along with the student population in the area. He's now investigating a "Plan B", which will involve buying properties in West Auckland that are suitable to have an extra bedroom added by converting the garage or moving walls thus increasing the rental yield.

When market segments become oversupplied it doesn't always mean you need to try a different style of building. It may be that you need to move your operation to a different geographical area.

Spotting a gap in the market may well prove a winner. Maybe, says King, with the population ageing and home ownership rates dropping, that might be older people who want properties close to amenities with alterations such as ramps, and handles in the toilet and shower.

Blocks of flats
A darling of property investors, but in increasingly short supply are blocks of flats. Often these are three or four brick and tile units on the same site.

"Sausage blocks" as they're known in the industry are never going to win architectural awards. But they've been kind to investors over the years.

By owning the entire block you avoid dealing with problem owners, and body corporate managers who can be difficult, says Chas Wilson of Chas Wilson Realty, a specialist real estate firm that handles the sale of many of Auckland's blocks of flats. Entire blocks also cost less per unit to buy which means that the rental yield (rent, expressed as a percentage of the purchase price of the property) is higher.

State houses
State house tenants, who'd have them? The answer is investors who want their rent guaranteed 52 weeks of the year by the Government along with guarantees that damage will be repaired and no midnight calls from tenants. Housing New Zealand needs 1000 new homes a year and instead of building, it leases many from private landlords. The downside is that the landlord has a 10 per cent management fee deducted from the rent which can in the current market take the icing off the cake.

Minor dwellings
A money machine in your back yard is how some investors describe minor dwellings - secondary homes on a section but under the same title. It's possible to buy a ready-made minor dwelling from the likes of Versatile Homes. There are also companies specialising in building minor dwellings with investors' needs in mind costing around $150,000. The idea is that two dwellings on the same site can rent for nearly double one. It should be said that it is often not legal to rent out sleep-outs if you don't have building consent. Some landlords rent both structures to one group of tenants.

Conversions
In the 1950s and 60s when villas and bungalows were seriously out of fashion many were split into two or more flats and rented out.

Investors buy conversions because firstly rental yields are higher on two flats than one house and secondly they may be land banking - holding on to the buildings until the property cycle is at the right time to demolish and subdivide.

Says Wilson: "An example is a Grafton property we have for sale that is split into four flats and rents for $1200 a week. The same property as a single house would get about $800 to $900 a week."

Conversions are a dying breed because the erstwhile slums where they're often situated have become fashionable again.

Boarding houses
More of a business than a property investment, boarding houses have fantastic cash flow, says John van Velthooven, estate agent at Crockers. He has sold more than a handful of them over the years and the gross rental yields are still in double figures, while other rental property in Auckland is struggling to turn five or six per cent. Owning one of these buildings - often double-storeyed villas - is not for the faint-hearted. They need hands-on management and you might encounter problems with your tenants such as alcoholism, violence, marital disputes, drugs and non-payment of the weekly cash rent.

Subdividing
The property cycle is key to certain specialist property investments and subdividing full sites is a good example. Fortunes have been made by doing just this. Property market analyst and author Kieran Trass says that at the end of a property boom building costs get too expensive for the numbers to stack up. "We are finding if you can add two more houses to the section the numbers are better."

Properties that can be subdivided often have that factored into the price, says Stuart Wills, mortgage broker at Mortgage Link West Auckland.

Student accommodation
You won't have trouble finding investors who concentrate on the student markets in cities such as Dunedin, Palmerston North and Christchurch.

Auckland investor Simon Shreeve, a member of the APIA executive, does much of his investing in Dunedin relying on the constant supply of young people who have moved to the city to study.

Dunedin landlords in particular have favoured studio developments, although it's said that the market is now saturated.

Students can be heavy on the wear and tear side with rental properties but often they have financial backing from their parents which means you'll probably get your rent.