It goes without saying that these are challenging times for property investment in general, with increasing interest rates, difficulty in borrowing money, and the increasing compliance costs imposed by the government.
To add to that mix is now the threat of Omicron coming to New Zealand, which adds another layer of uncertainty to where property prices are heading this year. Let’s take a step back and look at the bigger picture for a moment.
Should you invest in property for capital gain or cash flow?
Isn’t that a million dollar question. It is commonly believed that there is a trade off between cashflow and capital gains. Some property gurus used the combined annual return of 15% for both. Cash Flow return %+ capital gain %=15%. As you can see, if a property cash flow is strong, say 6%, capital gains will be only 9% and vice versa.
The answer to this question depends on how you invest in rental properties. Some people pay full market price to get positive cash flow and they will only gain capital appreciation when the market goes up. If you are only betting on the market going up, then cash flow may be the most important aspect of your investing strategy.
Some of the most sophisticated investors we have seen at UNO tend to always get a good deal on their properties at the time of purchase, which means they are forcing capital gains as soon as they buy. Arguably, cash flow is not as important in these situations because there is a built-in safety net.
If the market drops, it is vitally important that your property still makes money. Most people who lost everything in the last housing crash were buying properties with little cash flow and hoping prices went up.
Having said that, if you have plenty of cash and are looking for big gains, capital gain is the play to go with knowing if the markets change, you may have to sink some money in the properties until things improve. Typical purchase would be properties on massive subdividable land which had done extremely well for property investors in the last 24 months.
Capital gain or cash flow?
Pure cash flow positive properties are difficult to come by in Auckland, but that does not mean you should be a property that returns little rent on a big section if you are cash strapped. For any investor, having some level of cash reserve is essential in case things do not go as planned.
If you have plenty of cash, buying at discounts for big gains as soon as you buy is definitely the way to go and it appears there will be plenty of good opportunities coming up.