The population of NZ is, according to our statistics dept, growing to the tune of one extra person every 5 minutes and 55 seconds. This is calculated considering one birth every eight minutes, one death every 14 minutes and one immigrant being granted NZ Residency every 8 minutes.
Property prices are climbing out of reach, the Government is reducing incentives for local private investment to help supply, a new Overseas Investment Act is arriving soon, teachers and nurses are striking for more pay and it is more common to see both partners in the work force to help make ends meet.
With little time to look after those that need us, child care and retirement villages are flourishing around the country and one cant help but to look to the future to see where we are all headed.
With home ownership rates the lowest in 66 years (NZ Statistics Dept) it looks like we are heading towards a ‘rental economy’ and one wonders where all the superannuation is going to come from in the ever-certain scenario where we can’t look after ourselves when we hit 65 plus?
Many of us have equity in our homes with an LVR below 80% if you purchased pre-2017. Buying another residential property may not be wise in the current market unless you can add growth by doing the property up, subdividing, utilising a zoning change or changing its use. However, a commercial property can be purchased cheaper (than residential), with a higher yield and with more definite value added opportunities if carried out properly. With yields in the range of around 5 to 7% in the main centres around Auckland and up to 10%+ in other areas, you will gain a positive cash-flow with a commercial investment. This cash flow can be used to reduce your home mortgage so the net result is that you will have grown your asset portfolio and your mortgage will be paid off faster than it would have if you did nothing. If the interest rates rise, this positive cash-flow would act as a hedge for that risk, so you are covered here as well.
When you look at the above scenario, you may be asking yourself why you are not doing this, however, wait, you need to be careful, there are no free lunches out there. Every upside comes with its own measure of risk and this is no different. There are certain rules you must follow to reduce this risk.
- You need to find a town that has a growing population, growing business area, positive plans by the local council.
- Various industries (i.e. not a one-horse town) in place.
- You need to look for the big retail outlets that feed on growing populations, use the benefit of their research and trust that they know what they are doing by locating in this township.
Once you have the right location, the next step is to see what is available in your price range and then to gather information so you can analyse the leases. These are some of the factors that need to be undertaken, in addition to making sure that you can add value before you make the purchase.
Then you have started your portfolio and if done properly, you can keep going by adding more properties and more cash-flow.
You can sit back in life and hope everything will turn out ok or you can plan your life and make sure everything works out superbly!
The author of this article has written a book outlining the ins and outs of commercial property in NZ, the first book on the book shelves since pre 2008. Available now at your local book store.