NATURAL SANDS CUMULUS FREE DELIVERY FREE PARKING ‘You would be a fool not to invest in property’

Press, 10 February 1983, Page 12

NATURAL SANDS

CUMULUS

FREE DELIVERY

FREE PARKING

‘You would be a fool not to invest in property’

In Residence

Patricia Herbert

PROPERTY REPORTER

lei" columns for a guide to the rents being charged is fraught with uncertainty because the product varies enormously. No two flats are alike.

To complicate the issue further, there is the human factor. Landlords with reliable tenants prefer to keep them either on the “devil yoi know" principle or because a change in tenants almost always requires some outlay for advertising or maintenance.

A wall which looked presentable with posters and pictures hung on it may look scrappy when they are removed; some cleaning will need to be done; there is the risk of a non-income producing gap in occupancy. Landlords with long-stay-ing tenants often allow their rents to slip below market value because they are reluctant to raise them too often, or to raise them by too much. Mr Roberts owns 14 flats. He once had 27 but has since demolished some to build townhouses on the sites. He became a landlord, he says, because he was “a bit of a handyman"' and because he was interested in property investment.

“I could see that it was the only thing that kept money up with inflation so I bought a house and converted it/' There are three ways in which to profit from the business: renting, buying low and selling high, and using the properties as security to raise loans or refinancing.

He looks to the last for his primary source of income. A house bought 10 years ago for $7300, for example, might be converted into three flats for $4OOO to produce a total cost of $11,500.

That property would now be worth about $45,000. and could be refinanced for more than $30,000. The owner would then have taken out his original investment plus more than 100 per cent profit and could use the money to buy another house.

Mr Roberts agrees with the Bob Jones (Wellington property developer) philosophy that money should be spread as far as possible. A would-be buyer with $20,000 to spend is better

advised to put $lO,OOO on two properties and borrow the difference than to opt for a lower mortgage by investing the whole amount in one property. Capital gains have been running at 8 per cent over the past 10 years, he says, and “on two or three properties it does not take long to run up a considerable amount." In the meantime the rents should cover the interest payments, the rates bills, and maintenance costs. He stresses, however, that landlords must be prepared to invest long term. "You are lucky to break even in your first year and it is five years before you begin to show a return." Rents in Christchurch, he says, have not kept pace with inflation. Traditionally, they represented about 35 per cent of the average wage. Before the rent freeze rents had crept up to about 32 per cent, but have since fallen back to 27 per cent. During the same period interest rates have more than doubled; from 7 per cent on a first mortgage in 1970 to about 18 per cent today. The effect has been to erode the landlord's profit margin. Mr Roberts says that few can afford to hire tradesmen at $l2 to $l3 an hour, and most do their own maintenance work. Although it is an interesting job because “you see how the other half live." being a landlord would “drive some people silly." “Tenants ring up at 3 a.m. and say that the water tank has overflowed." Mr Percy Caithness owns five flats. He says that it is impossible to get the return on rentals alone that he could get by selling his properties and lending the money on the open market.

Even if landlords maintain their flats themselves without charging for labour, they are lucky to clear 10 per cent a year on their investment.

However, he did last year. He says that he has always approached it as a business. "I am selling accommodation and both parties have their rights."

He collects his rents fortnightly because he likes to keep in regular contact with his tenants and to be told immediately of any repairs that need doing. He "puts in a lot of time free" on his properties, he says. "Most tenants are quite reasonable. It is simply a matter of treating people as people." Mr Caithness does not like the term “landlord." He says that he is not a "lord." he'is an ordinary businessman not out to fleece people but trying to get a good return.

He became involved because he had always been told “to get into property." At one time he owned several flats, but has since sold many of them. With capital gains and rental income during the period of ownership together.' he thinks he received "a pretty reasonable return" on his investment. The third landlord we spoke to preferred not to be ‘Ridiculously low rentals’ named. Neither would he disclose the number of flats that he owned, but it is sufficient to warrant a fulltime office. He is a professional landlord and has been for 30 years. Asked what attracted him to the industry, he replied that, like most’ landlords, he fell into. it. “Most people start ofl through some accident. 1

don't think anybody plans to be a landlord. It is an odious occupation and the last thing you would consider being when young and idealistic."

He derives his return from rentals and through refinancing. Capital gains is a "spinoff." he says. Landlords are not primarily speculators. He used to sell properties when he was short of cash but realised that after stamp duty, solicitors' fees, and land agents' fees had been paid, he "got no money out of it." Now he just remortgages them. Many of the rents he charges are unrealistically low. he says. He quotes the example of two one-bedroomed flats in a sausage (row of small units) development. In 1975 he charged $lB a week for one and $l7 for the other, and has been "putting little rises on since" but is now letting them for only $35 and $36 a week. The current market value is about $5O a week. Another tenant pays $3B for a flat worth $45. and yet another. $35 for a flat worth $5O. But he says that they have been there a long time and that he could not raise their rents to value in one jump. "It would be too high." It is so long since he got a decent return on his investment or. in some cases, any return at all that he has stopped even thinking about it, he maintains. "When I started the average rent was about L'3 for a flat a week. Out of that you could do your sums, but now it is completely changed." Increased interest rates have destroyed profitability. In the 19505. interest was charged at a standard 5 per cent, which worked out at about $1 a week per $lOOO owed. Now the going rate is $3.60 a week, and rising prices have increased the borrowing commitment. Rates have also risen but less drastically, he says. "You are not going to make a profit now unless you inherit the property, get it cheap, pay for it outright or bought it years ago." Asked why he stays in the game given the bleak accountancy. he explains that he has backed himself into a corner. There is no money

about and he could only sell his flats by offering them at • sillv" prices. The credit squeeze began for rental property buyers in 1954. and has not let up since then except for a brief boom in 1973 when the Labour Government eased overdraft restrictions. But that mostly benefited builders Thev bought old houses, demolished ’them and built modern flat complexes on the site so that the Government could point to the large number of new dwellings erected during its period tn office, he says.

He would not sell even if he could find a buyer because he needs to maintain a certain size investment to justify the office, and because the costs of looking after an extra property and collecting the rent off it are negligible for him. Also the return on flats bought "years ago" is quite good in terms of the original investment, although not good in terms of today s prices. "If you bought a house now. v’ou would be lucky to get 13 per cent. That is why flat sales are so slow. Investors won't buy unless they can see a return."

He cites two flats bought in 1979 for $18,700 with monev borrowed at 13 per cent.' The interest repayments equalled $48.62 a week and at the end of the year, after a rent rise, he was receiving $53 a week for them.

The rental scarcely covered the servicing costs and with rates and maintenance added, he was in the red.

"That is a typical example, absolutely typical." he says. However, by 1981-82 the value had improved. "If you work it out 1 probably didn't do so badly after all. by capital gain is a very nebulous. pie-in-the-sky thing. Generally, your relatives get the advantage of it when you die."

Adding to the costs is the fact that his flats may be unoccupied for as much as a quarter of the year. Students vacate in late November, early December and he is often unable to re-let until mid-February. There is ’ little demand, tradesmen are on holiday, and he is reluctant to rent then because “that is when the bad tenants slip in." But. at the end of the day. he says that the rewards are there.

"By and large you would be a fool not to invest in property."