Issue 55 - Investing for retirement - September 2009

For many years in New Zealand, many of those wishing to provide for their retirement have made the decision to invest in rentable property. Despite it being fashionable to decry the Kiwi addiction to ‘bricks and mortar’, property ownership should be part of every diversified portfolio, along with stocks, shares, bonds and cash.

There are many pluses and minuses to property ownership as a path to financial security, however.

The pluses include such things as capital growth; providing a bulwark against erosion of values by inflation; (in fact a little inflation isn’t such a bad thing for property owners as yesterday’s loan is being repaid with tomorrow’s dollars – as I’m sure every owner is well aware) and, to some extent, pride of ownership.

The minuses, however, are not always recognised by some owners.

First, it must be recognised that property ownership is a business and must be looked at as just that. Therefore, proper actions must be taken to both maximize rental income and also maintain the integrity of the property.

A surprise for some landlords will be the idea that ‘maximising income’ does not necessarily mean charging the highest rent possible. Rather it means charging a rental that will attract tenants who are not going to destroy the property in which they live, thereby giving the best nett return.

Even tenants who don’t actively destroy a property by rough behaviour, can affect its value by allowing rubbish to accumulate (thereby attracting vermin) failing to ventilate the property (thereby encouraging the growth of mould) and failing to perform previously agreed maintenance of grounds.

As well as that, the buildings also require constant maintenance. Even if tenants are model tenants, time and weather will affect the property little by little. People who live in their own homes tend to these little jobs as they need doing, but frequently those little jobs get left undone when the property is a rental, as the costs of little jobs seem to be disproportionate to the size of the job. Think tap-washers.

It is unfortunate too, that many landlords regard their properties as milch cows and want to keep on receiving the very highest rents while at the same time failing to keep the property up to a standard deserving of those rents. Many times, even essential maintenance is deferred, with the result that the property eventually becomes untenantable and finally has to be sold at a great loss to the owners.

Finally, while some landlords are landlords by deliberate choice, others are landlords because they weren’t able to sell their property for the price they wanted to, when they wanted to. They are the reluctant landlords. They are not investors.

Usually, the reluctant landlords are those whose family homes have become an investment because circumstances have required the family to move, leaving their home behind.

Unfortunately, because most people in this group are relatively young, they quite often have a large loan that has to be serviced and therefore monthly loan repayments are frequently greater than monthly rentals being received. They therefore have to service not only the balance of loan repayments, but also the insurance, the rates and maintenance. Because the loan repayments, rates and insurance cannot remain unpaid, it is the maintenance that suffers.

When reluctant landlords eventually decide to sell, they cannot quite believe what has happened to their lovely family home. Without them there to experience the discomfort that comes from a poorly maintained home, the normal maintenance, in many cases, has simply not been done.

My message is very simple. If you have decided to be a landlord, (for whatever reason) be a good landlord and ensure that there is enough positive cashflow to enable you to keep the property in good repair. It will pay dividend in the medium term.