Are there a lot of relatively new, highly indebted investors who’ve never weathered a market cooling? That being a possible drop in house prices/values and an interest rates rise? What’s going to happen to them?
Without doubt, many investors will sell property because of interest rate rises. This is exactly what the Reserve Bank is “banking on.” Rising interest rates is the only direct tool the Reserve Bank has at present to influence demand and supply forces in the property market and thus slow house price rises. If more property comes onto the market then there is currently, and the “days on market” (term for how long it takes for a house/property to sell) extends out, then the housing market in particular will cool off.
Property Investment takes patience and a long term view. The frustrations are numerous and with the cost of the mortgage going up as a result of interest rate rises, then many investors will decide they have had enough and will sell their investment property. This article looks at why investors shouldn’t exit and what strategies they can employ to ensure they can “hang in there.”
What has always surprised me in my 13 years in the real estate industry is the short-sightedness of many investors. The real benefits that can be accrued from real estate investing are a result of time. As time goes by, the rent gets higher, on a Reducing Mortgage the mortgage payments get less and the property goes up in value. Time is a huge factor that has provided real estate investors with immense rewards. However many an investor gets frustrated with the “downside” of property investment and quits before they experience the real benefits of long-time owned real estate.
Without doubt, being a landlord has built in frustrations:
- tenancy problems
- property maintenance
- rises in the borrowing cost of money
- rental income not growing at the same rate as costs
. . . . . to name a few.
It is not often that I agree with Olly Newland (we are still waiting for his predicted property crash), but he is right about the patience it takes to be a real estate investor. In his book Climbing the Property Ladder he states:
“There will be times when you will cry with frustration. There will be times when you will tear your hair out trying to make mortgage payments. There will be times when your courage will be sorely tested.”
The cost of investment property ownership is going up because of local body rate rises, insurance premiums and mortgage interest. Rent rises (if any) are only accommodating a portion of these increased costs. Many ‘newbie’ investors will get frustrated and decide to quit the market. At some point, all fixed term interest rates expire and the cost of mortgage money will go up. Many will get sick of “topping up” mortgage payments on their real estate investment/s and decide they have had enough. That is going to be a key decision factor in many quitting.
Capital appreciation rewards of property investment are a result of time. Generally, the more time one owns a property, the more valuable it will become. A lot of investors getting out of the market may only kick themselves for doing so, 5 years on. Generally, property is not going to get cheaper. All the hard work that investors have done to get to this stage in their investment property portfolio will be whittled away from a sale. They may extract some funds and put into another market – shares for example, but the real benefits of property ownership that are associated directly to length of time of ownership will never be realised.
- Read about property investment and read about those investors who have gone before. Real estate investment is a game of frustration – that’s what makes the rewards taste sweeter. Real estate investors need to develop a hardened mentality if they are to survive the ups and downs of ownership
- Cut down on other expenses to assist with meeting the extra mortgage payments on an investment. This is your future you are planning for, here
- Borrow more on the increased value of the property and put aside this sum for the extra monies that will be needed each month. If this means the difference between you selling or keeping your investment property – this strategy alone is worth it
- Raise the rent. When was the last time the rent was increased? There is a huge demand in most parts of the country for rental accommodation. You may well find your property is under rented. The commercial property sector has always been able to grasp the concept of raising rents. We tend to find residential property investors less informed on rents that could be achieved and less inclined to increase rents in case they loose a tenant
- Put your rates and insurance costs on monthly automatic payments. Less of a shock than when they come in annually/periodically
- Change your P and I (Principal and Interest) mortgage to Interest only – this will reduce the mortgage payments.
Property Investment has never been for the faint hearted. There are always factors that will influence your portfolio that one cannot control. Without doubt one can minimize risks via;
- great tenant selection
- strong property management
- fixing interest rates in a rising rates environment
To those investors who are looking at getting out of the market because of interest rate rises in particular – hold on if you can. Many a seasoned investor will tell you that their only regret is that they didn’t either buy more real estate years ago or hold onto property they have sold.
Home Ownership rates are falling and private renting is growing. Census data reveals that between 1991 and 2001 the rate of homeownership in New Zealand fell from 74% to 68%. Rates have fallen for all levels of income, across all ethnic groups and most dramatically for the twenty and thirty-year-old age groups. There were 57,600 fewer owner-occupiers in those age groups in 2001 than in 1991. If these trends persist; the homeownership rate could possibly fall below 65% by 2011.This would mean that 80,000 fewer households would be homeowners than if the 2001 rate of home ownership applied. This means that a residential property investor will have a growing pool of tenant clientele – which means rents will rise and vacancy rates will reduce.
Reproduced with permission from Mark Ferguson.