Setting aside Habitual and Emotional Drivers, you Might start Considering a Stock type you Hadn’t really Investigated Before - Campbell Venning

The biggest change we have seen since 2010 when depreciation on buildings was revoked has just hit the residential investment market.

Fallen in love with that rambling old villa with a For Sale sign hanging from the clematis hedge? Tempted to put in an offer on that block of flats across the road from where you grew up? Wowed by the tiny cottage’s magazine – quality roses because it reminds you of your first home’s garden?

If you answer yes to any of the above, beware. Buying a property for investment is an entirely different beast than buying your home. You may love a particular era, a certain look, or prefer a certain size, but the thing is, you’re not actually going to live in your investment. Making decisions about your investment with your emotions, rather than with cold hard mathematics, can lead to trouble.

A successful investment depends on weighing up facts, factors and figures. And one of those factors is property ‘type’. Categorising by property type helps you further pinpoint the best options for your investment dollar and it has to be taken in to consideration alongside those other factors such as location, where the property type lies in the property cycle, and purchase price - to name a few.

Property type is simple because we are talking about only three main types here:

➤ Apartments.

➤ Townhouses.

➤ Houses.

There are of course, further categorisations within these, such as second-hand versus new, but those three are all distinct property types that need to be considered independently.

Apartments

In some locations, apartments just aren’t sexy because they don’t fit the location, the demographic or the demand drivers. Yet in other places, demand for apartments is heating up.

Auckland and Wellington are relatively mature apartment markets, whereas in Christchurch the apartment market is still early in the cycle. That’s why so many Auckland and Wellington investors are buying in Christchurch, they have seen first-hand a move to this property type and are more comfortable buying it.

Location And The Cycle

Selecting stock type also needs to be looked at in terms of the location and where it is at in the property cycle against property type. At the Property Factory our location and property cycle rules are very much aligned and it never ceases to amaze me how many investors move with or after the masses, versus reading the signs before this happens.

Another way to master this skill is to look at pricing for second-hand properties against new. Often a trigger for new builds in a location is when second-hand house prices creep up towards new. Why buy old if you can buy new at the same or similar prices?

Old Habits Die Hard

A quick search of properties in Wanaka on July 22, 2016, showed five second-hand three-bedroom, two-bathroom properties for sale between $700,000 and $970,000. Similar-sized properties in the new Northlake subdivision could be built with a combined house and land price of $500,000 to $600,000.

While this subdivision was well received by local (60 sections sold on launch day in 2015), a few sites still remained for sale as recently as July 2016. This is not a product which investors would usually consider based on old habits, as house and land purchases are more complicated than an existing property.

Yet often the gains can be in the $100,000+ level, so it should be on every investor’s radar. Also consider that new properties are EXEMPT from the new LVR rules imposed by the Reserve Bank whereas secondhand isn’t, why buy old?

Setting aside habitual and emotional drivers, you might start considering a stock type you hadn’t really investigated before. Lot sizes and houses are becoming somewhat smaller as many people become less enamored with the idea of spending their leisure time maintaining their quarter-acre section.

Tastes are changing, as are tenant demographics, with smaller families and migration both impacting the demand for less-traditional property types. So by compartmentalizing real estate by stock type, then considering that stock type in a particular place, stage, and time, you can let the numbers to the talking to guide your investment decisions.