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What Makes a Good Investment Property?

By Ali Frederickson

An Interview with Lochore’s Chris Gemmell

How do you recognise when an investment property has real rental potential and the potential for future capital growth? This is the question that lies at the heart of property investment. Not all properties are created equal. Your challenge is to find the ones that will make you money, diversify your portfolio, and remain viable over the years—and even the decades—to come.

An experienced real estate company could have a profound impact on the success of your property portfolio. Lochore’s Real Estate has been that company for many North Shore property investors for over three decades. Recently, Licensed Lochore’s Real Estate Agent Chris Gemmell sat down to share his thoughts about North Shore investment properties. Discover Chris’s insights into the key elements of a promising investment property, the impact COVID-19 has had on the North Shore property market, and what the future holds for investors.

What key factors indicate a valuable investment property?

According to Chris, “There’s no silver bullet,” when it comes to spotting a lucrative investment property. Several factors contribute to a top producing and reliable investment property, but all revolve around the potential to attract tenants who will reliably meet their financial obligations and preserve the quality of the property.

Chris says that, with the right investment property, “You’re going to attract the right tenants. There’s going to be a steady demand for that type of property from the tenant profile… So, in other words, it’s in a location that’s in demand. It’s generally a low maintenance property because tenants don’t want the huge backyards for maintenance or have to get out there with a paintbrush for the landlord.”

He also always recommends that an investment property has covered parking, such as a covered garage or at a minimum a carport, and adds that investment properties should obviously be well-maintained, with kitchen and bathroom appointments that are up to scratch.

Find properties that will diversify your portfolio

Chris finds that it’s good to have a mix of property types across your portfolio if you have more than one property.

“This way, you’re spreading your risk from either professional working couples through to perhaps a younger family,” said Chris. “Over the long run, investors tend to prefer properties where there are two working tenants, such as a working couple with two incomes coming in, that can provide a more stable platform for paying rent regularly.”

Does this mean that property owners and landlords should be discriminating against the likes of students or larger groups of individuals? Not at all. Lochore’s property managers abide by strict anti-discrimination practices, but property investors should be mindful at the buying stage of the type of tenants a property is likely to attract. This is important when diversifying your property portfolio and mitigating risk.

If a landlord has numerous different properties and they’re all of the same type—such as the same location, the same type of property, or in some other way targeting the same type of tenant—they can be quite vulnerable to large-scale market changes.

During New Zealand’s lockdown, for example, many city-side apartments that were rented out to students were impacted heavily by the ongoing border controls. A lot of those students could no longer remain in New Zealand, and those properties are now coming up for rent or sale. If your property portfolio had targeted this tenant type exclusively, you could find yourself in a difficult situation. So, Chris recommends that property investors have a mix across their portfolios. They could be in different locations, or two- or three-bedroom configurations and layouts.

Property selection will determine what type of tenant group you’re targeting, and Chris believes location is a very important factor.

“Certainly, for the North Shore, people want to be closer to fast commuting bus services or motorway onramps to reduce commuting times, which have been building up in recent years in Auckland.” Properties that are close to commercial centres like Birkenhead or Takapuna, or near schools, if it’s a family type of house, will likely attract more stable tenants.

Additionally, a property with views or privacy from neighbours and that is well-fenced and secure will possess many attributes that bode well for tenancy selection.

Regardless of the property type, Chris also recommends that landlords play an active role, in that they drive past their properties from time to time. Alternatively, landlords can get their property professionally managed by a competent rental property management company.

“There are a lot of risks and pitfalls of managing property on your own today, and a lot of landlords are not aware of the current legislation under the Residential Tenancies Act. There are quite severe fines if landlords do the wrong thing. We do have the healthy homes standards which are being revised, and landlords must implement those changes by July 2021. So, in many ways, the clock is ticking for landlords to ensure their properties are compliant.”

How has COVID-19 impacted the North Shore property market?

“One of our monthly barometers to check on the state of the market is the volume of sales,” Chris says. Lochore’s relies on the Real Estate Institute for these statistics. In April, the North Shore recorded a total of 102 sales, a 65% decrease from April 2019. In May, 154 unconditional sales were confirmed, down 57% from May 2019. This was only for the North Shore, but it is not atypical from the nationwide stats, as COVID-19 affected property sales throughout the country.

“What it’s showing is that there’s actually a shortage of good quality investment properties currently listed on the market,” Chris says, “and homes suitable for first home buyers in the more entry level price brackets. So, the buyers right at the moment have fewer choice and those [properties] that are well priced, we’re getting very strong buying enquiry and, in most cases, multiple offers on properties within two or three weeks on the market. So that’s showing us there’s strong demand for a good investment property when it comes on.”

Why has demand remained high? First home buyers and parents helping their kids onto the property ladder are likely energised by New Zealand’s historically low-interest rates. Fixed-term mortgage rates for 2 years have dropped to around 2.69%, and LVR (Loan to Value Ratio) restrictions have eased. New Zealand’s Reserve Bank has placed a limit on banks for the percentage of equity that buyers need to have to place a deposit to buy an investment property. They have relaxed those rules, which is allowing more investors to come back into the market that had been restrained up until now. “Low-interest rates and a lack of listings is really driving that demand,” Chris says.

He also thinks another interesting factor may be at play. “When people have been in lockdown for a month, they’ve had time to research the market, check that their jobs are secure and have come out to play since our release from Alert Levels 2 and now 1.”

What makes the North Shore such an enticing place to buy an investment property?

Having been an active investor for 30 years, Chris believes the North Shore is a safe place to have your money in investments because of its strong demographic and demand for rental properties. North Shore is a very relaxed place to live. It’s close to the city for work, and to commercial centres in Albany, Birkenhead, and Takapuna, as well as beaches, so it offers a great lifestyle.

Chris adds that “the North Shore has always been considered affordable and properties do well from a rental point of view. There’s a good demographic for tenants and there’s also been historically a higher capital gain compared to other parts of Auckland and other provincial cities.” This has been proven over the last 40 years.

Auckland is currently over 40,000 homes short, in terms of demand. Apart from some apartment buildings, there hasn’t been the volume of building on the North Shore to keep up with rising demand. We simply haven’t seen enough building on the North Shore, which is driving heightened interest from tenants.

So what does the near future have in store for the North Shore property market?

Chris is adopting a positive stance on the North Shore’s property investment potential in the wake of COVID-19.

“North Shore has come off a very strong baseline when we entered COVID-19 and that’s put it in very good stead in times like this when people are questioning whether our market will ease back, or values will drop. Depending on the value of the property and its location, that will depend on how much demand there’s going to be for that type of property and whether values will hold. Historically we’ve been experienced some good gains from the December to February quarter. While the median price for North Shore and wider Auckland homes are jockeying around each month, it’s not a reliable yardstick, because sale volume is way down.”

In other words, the low number of home sales that have occurred over the past few months means that a few high-value or low-value sales could have a more volatile impact on the median price. Ultimately, values have levelled through the COVID period. They have not dropped away but held firm, particularly those in the lower bracket (i.e. between $600,000 to $850,000), due to strong demand, while properties in the middle and upper brackets may well soften, depending on people holding their jobs. It’s worth noting that properties dropped up to 10% during the global economic crisis in 2008 but bounced back within 6 to 9 months. This was much better than some market commentators forecast back then!

A significant increase in first home buyers may be keeping the prices firm on the Shore as well. First-time buyers are scrambling because interest rates are suddenly so low and they can now afford properties, so that’s making a big difference in what they can afford to pay.

Lochore’s has assisted many clients with their portfolios over the years. They regularly touch base to discuss their onwards strategy and seek our guidance on how to maximise their portfolios over time.

Investment Property Case Study: Why it pays to be patient

Chris and the rest of the Lochore’s team regularly note that property investment is not a short-term wealth generating strategy. Economists and media focus on the short term, like over the next 6 months or so, but with investment properties, the goal is much longer. That could be 15 to 20 years from now to generate a comfortable retirement for example, so it doesn’t matter what happens over the short term. What’s important is making sure people buy the right property in the right location for the right price, and that it’s going to have good, strong tenancy demand.

A great example involved the recent sale of a property in Takapuna. A property investor couple working with Lochore’s purchased the property in March of 1994 for $106,000. Twenty-six years later, they sold it for $665,000, representing a capital gain of $559,000—or 527%—from the original investment. Ultimately, that works out to an average gain of 20% per annum.

Learn the North Shore market alongside Lochore’s

Working with the right North Shore property investment specialist is the first step toward investing in the ideal properties. Chris Gemmell is a proud member of one of the most experienced sales  team of licensed real estate professionals at Lochore’s, ready and waiting to help you build a property portfolio that delivers. Contact Lochore’s today to learn more.

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