Section2 Investor Series #1
Right now is one of the most challenging times I’ve experienced in my 20+ years of investing in property. Why is that? Take your pick of high interest rates, strong inflation, high leverage levels and a weak property market.
In addition to that, if you’re like me and have a few older properties, the maintenance schedule includes a roof replacement or 2 within the next 1-2 years.
Yes we’re all pleased that we’ll see the return of 100% interest deductibility from April 2025 and thanks very much National for reducing brightline to a very sensible 2 years on the 1st July.
But just like the business community, investors are more confident spending and investing into their portfolio’s when money is cheap and values are strong.
By the way, when are we getting back to a neutral interest rate?
The rhetoric around the OCR and interest rates dropping sooner has increased from some of the banks, of note ANZ and Kiwibank. This feels somewhat defiant as the RBNZ staunchly defends its position of nil cuts until the second half of 2025.
ANZ, you’ve convinced me that there’s a possibility for core inflation to drop under 3% in the 4th quarter. But how about that stubborn non-tradeable inflation?
Non-tradeable inflation encompasses a lot of the cost base that we as investors are struggling with. Substantial increases in rates and insurance have driven rents up. Some non-tradeables respond very slowly to monetary policy, or in the case of insurance, maybe not at all. The impact of pandemic and weather related disruptions will ensure insurance premiums remain elevated.
Construction cost increases have not only contributed to higher inflation but also failed in closing the supply gap for new housing.
With 70% of inflation consisting of domestic drivers, I expect non-tradeables to remain sticky by the end of the year and my focus remains on easing sentiment to appear between February and June 2025
Buckle yourself in
I anticipate there’s still a fair amount of market shake out over the next 12 months as businesses fold, companies shed employees and mortgagee sales increase. They might have just held on since covid but are now starting to feel the pinch from economic conditions. Personally I’m with Tony Alexander and blame the RBNZ for keeping interest rates too low for too long post covid. However this reinforces my belief that the RBNZ will be overly cautious in starting an easing cycle. They won’t want to get this next move wrong.
What can you do?
- Minimise your cost base. Review your fixed costs providers like insurance.
- Negotiate better rates with your property manager. Have your rent paid twice a month instead of once.
- Smooth out your cashflow by paying for rates and insurances monthly.
- Ask for a cashback when you fix your loan – most banks are paying them
- Review your rent – make sure you’re getting market rates
- Get your loan structure right. I’m fixing short terms (6-18 months) and ensuring I have plenty of buffer for unexpected maintenance. i.e. consider a revolving credit facility.
- Are there easy value adds that will increase your return? eg add a bedroom, new carpet and paint.
- Are there bigger value adds that will give you an additional income stream eg add a minor dwelling, convert a garage, subdivide and build a second dwelling.
In summary
Hold on if you can. Get expert advice to review your portfolio.
If you can ride out the next 12 months I believe both your cashflow and your equity will see gains and you’ll be pleased you weathered the storm.
