Investor Graeme Fowler has accumulated wealth from rentals equivalent to a major lottery win. Here are his tips. Photo / 123rf
Buying rental properties is often viewed as the ultimate retirement savings plan or akin to owning a goldmine - and there is merit in the view.
House prices have boomed over the past 20 years, driving Auckland's median value up by more than half a million dollars from $235,000 in 1999 to $831,000 now.
That's serious coin in the bank for those who bought years ago.
According to real estate firm Colliers, it's led rental homes to deliver better financial returns - from rents plus capital gains - over the past 15 years than money invested in the stockmarket or commercial property.
So better start buying, right? Well, there are some things to consider first.
For one, rental properties are now often seriously expensive to buy. And once you spend your savings buying one, there is no rule to say it will automatically go up in value.
On top of that, ownership costs have risen. New Government regulations designed to make rentals better for tenants have forced rental owners to spend more money upgrading their properties.
So is it still a good time to buy an investment property?
Millionaire Hawke's Bay investor Graeme Fowler says yes - provided you can find one that delivers good rental yields and the deal makes sense on the day you buy it.
Fowler and wife Katrina own about 80 residential and commercial properties and in 2017 traded 24 properties for a profit of just under $1 million.
That's made them as rich as a major Lotto winner.
"If we sold all our rental properties and paid back the mortgages, we'd have around $20 million cash left in the bank," Fowler said.
Yet his riches weren't founded on lucky punts or predicting future price rises with a crystal ball, he said.
Rather, the key to his success was buying properties offering good rental yields and then holding on to them for the long term.
Rentals with good yields are those where the rental income is high enough to pay for most - if not all - of the home loan repayments and other ownership costs, such as the mortgage, rates, insurance and property management fees.
This means an investor needs to - in theory - only stump up the cost of the deposit.
Then, without spending any more money, they ultimately end up owning a fully paid-off home.
That's Fowler's goal, to have multiple, paid-off rentals that deliver him an income he can live off.
With his current properties, that would equate to an income well over $100,000 per month pre tax.
It's a strategy that doesn't depend on house prices going up. And that's why he recommends it to others as it's "a lot" lower risk.
"In other words, as long as the rent covers all of the outgoings, that was all I needed to know," Fowler said.
"I have never been concerned about what house prices are doing. It's one of the most ridiculous subjects people talk about.
"You will often hear people say how their home has gone up so much in value, and I get the impression when listening to such nonsense, they think they are smart."
Just like the daily weather, Fowler said he never knew what house prices would do from one year to the next.
"The weather is going to do what it does, and all you have to do is dress appropriately for it."
Fowler's strategy worked especially well in 2014 in Hawke's Bay where he and Katrina live and own most of their properties.
The region's prices dropped by close to 30 per cent between 2006 and 2014.
It meant if you'd bought a property for $190,000 in 2007, chances were it was worth only about $135,000 to $140,000 in 2013.
Many investors were running scared and selling up. But Fowler started buying.
"When prices were really down, the numbers and rental yields seriously made sense," he said.
He bought 20 rental properties in 2014 by taking out home loans secured against the value of other properties he already owned.
"I was able to buy 20 properties for a total of just under $2.5m and put no money in myself," he said.
"The rent covered the mortgages - which are all 20-year principal and interest loans - the rates, the insurance and also property management fees."
"So it doesn't matter whether the rentals are worth $100,000 or $500,000. What matters is the cash flow from the rent once the debt is paid back on all of them."
"For all I knew, the prices could have kept going down even further and it would have been no concern to me at all."
Just six years later, those 20 homes had now "created over $4m of equity", he said.
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Fowler likened it to how excited shoppers rushed into supermarkets and shops when a sale was on. He said investors needed to use the same logic when buying houses.
Yet in 2014 most buyers - especially investors - couldn't see the big picture that the homes would've paid themselves off over the longer term.
"They could only see how much money they thought they had lost because the value of their own properties were all going down," Fowler said.
Fowler even wrote a book describing his experiences and tips from 2014 called 20 Rental Properties in One Year.
Fowler's trick in 2014 was to look for rental homes where one year's rental income was equivalent to more than 10 per cent of the home's value.
This 10 per cent rental yield was typically enough to ensure the rent covered the mortgage repayments and other expenses.
But it's not easy to find investment properties offering such high rental yields now house prices have grown faster than rents.
In such cases, Fowler recommended investors look for creative ways to get better yields.
That could include buying an older home and renovating it so it's possible to charge higher rents, or increasing the number of bedrooms or units on the property.
Or it could mean buying in a different location where house prices are cheaper but rents are still strong. Or simply putting down a bigger deposit.
Fowler has also traded properties - buying and moving them on quickly for a profit - like he did in 2017.
But he has also kept a core portfolio of rentals delivering good yields that he intends to hold on to for the long term.
That had always been his core strategy, he said.
1. Ask yourself seriously if you have what it takes to do this long term. If not, can you learn how to become the person that is capable of doing it?
2. Understand this a very long process. It's not get-rich-quick, but if you do it well, it can be a get-rich-slow process.
3. Save a deposit. Put this money away first - not what's left over after all your expenses. Most people spend more than they earn, and never put anything away for their future. Instead of putting the future first, they create a past.
4. Get to know what houses are worth, look at open homes, find out what properties are selling for so you have an idea of values.
5. Know the numbers. Research rents and make a point of really understanding what a gross yield is and what a net yield is. Play with the numbers on a mortgage calculator and work out how much rent you're going to get from a property and what the monthly mortgage repayment will be.
6. Don't be concerned about prices or what they're doing. And don't try to predict which locations either in your city, or around the country you think will increase more than others. Over time, most locations in NZ balance out almost identically, especially those with populations of 100,000 people or more.
7. In any industry you can think of, people have made fortunes and also lost fortunes. It's not about the business they are in, it's about the person running the business. The same applies to property investing. The playing field is the same, the only difference is you.
8. Join the Facebook Investor Chat Group. There are more than 25,000 New Zealanders on the site and the range of knowledge is huge. It's free to join and has a vast array of people you can ask questions of.
9. Build a solid and strong investing foundation. You want your overall financial position to be stronger each and every year, not weaker. Your bank(s) will also want to see your position improve each year.
10. Compounding interest is a wonderful thing. Those who really understand it, collect it. Those who don't understand it generally will pay it. Also remember the more wealth you accumulate, the more opportunities you will have – to lose all your money. So be a good custodian of your finances and your wealth.
• Stick to the basics of property investing.
• When considering a property, look at the numbers: do they make sense?
• Are you able to get a good yield?
• If not, can you create one?
• If not, are there other cities in New Zealand with 100,000-plus populations where it makes more sense to invest?
• If the answer is still no, can I put more deposit in to each property to make the numbers work and therefore give me better cashflow?
• At least then you'll still be using some leverage and have the tenants paying down your mortgage for you over time.
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