Since experiencing a housing shortage New Zealanders are concerned about the future and where to live. Because of the economical turmoil, financial disasters and the increasing expenses for rental housing people are tossing between renting and home ownership. If you are one of them thinking about a home to live in and as “nest egg” to retire on, have you thought about how to minimize the house related risks?

What are the risks when buying a property?

It will always be like this - a home is the largest expenditure you might have, but often a misguided purchase decision can be a pain for many years ahead. Apart from related buying costs (house price, legal and borrowing expenses) people make a purchase decision when fallen in love with the house, the view, or current conveniences like distance to work, recreation activities and more.

When signing the Sales and Purchase Agreement the bank, the agent, your lawyer - everyone cares that you put the money on the table, but are you aware about that as long as you pay for the mortgage the bank claims your house? Normally mortgage payments are between 25 and 30 years, a burden that kills relationships especially when the dream home becomes a leaking home from hell with potential hazards you have not identified when signing the contract. It is sad to see buyers who trusted builder’s reports and council’s compliance certificates but losing a fortune on repairs or even being bankrupt. Therefore “Try before buy a house” can be seen as effective time-convenient-risk management.

Try before Buy - an option for you?

The reality is that people often spend less time for signing up the purchase agreement for the house as they do looking for suitable furniture. The reason is that home buyers are pressured by the agent who is interested to seal the deal.

Try before Buy gives you sufficient time to secure a home on a fixed price with a flexible settlement for finding the best conditions for a home loan and to figure out building related issues. I would call it risk management with no extra costs. Why would you miss that opportunity? In case you are interested in more information - read here more.

When is the best time to buy your dream home?

Price-wise for buying a house the best time was yesterday, and today you need to decide if you want to sit out the recession or take the offer from your bank. But tomorrow it will be different because prices are driven up by inflation.

Best of luck

Klauster

The housing journalism can’t stop interpreting why housing is so expensive. Unfortunately I can’t see they looking at the roots.  Everybody who is looking for a place to live already knows New Zealand has a widespread housing shortage and that is even worse than the journalism about housing un-affordability.

Housing affordability - the economists are on the topic, followed by reports from Massey University and the public opinion like somebody (I think it was Gary McCormack on the radio, can’t remember), he said if the government can’t bring down house prices then “the democracy is stuffed”. Well, I think you are stuffed if you live in the “red zone” in Christchurch or you are the owner of a “leaking home”.

When it comes to housing as landlord I know what I talk about. Most people know that living in a house became expensive and it doesn’t matter as owner or tenant, the occupier pays for the running costs.

The purchase price or market value is what the home-buyer is willing to pay. That price depends on his income and the interest rates he can afford. How many buyers compete is controlled by supply and demand – right?

Many buyers agree that housing is “overpriced”, saying they paid too much for a shelter that is cold and damp, nowadays insulated but leaking and is low value for money. Well, that isn’t the good news either.

So, will the building costs go down in future or are they driven up by inflation? Certainly, you know the answer. But what is with all the other related costs like legal compliance cost, land values (and related City Council levies), and legal fees? It is obvious that driving up CVs for the purpose of increasing rates might have side effects for housing affordability. In contrast, where I grew up levies were based on the size of land and the services provided, were approximately a fifth of the market value and not exposed to sales statistics.

By the way, since 2007 the property CVs went down slightly and I asked the City Council why my rates are still going up. Interestingly the answer came from the City Council's lawyer – but that is another story.

As you can see the affordability of housing is a figure between purchase price and income - right? If you increase your income at the same the affordability gets better.

Regarding building costs we haven’t looked at the global driven and local costs for material. Let us have a look at the transportation of building material. For instance, we pay with higher petrol prices higher petrol tax and on top of it even more for GST and finally the sale price for a product includes again GST. I have seen the percentage of taxes we pay – they are absolutely huge compared with figures for wages and related expenses.

What then is the good news?

By reading so far, you have realized there is neither good news nor a quick fix to this problem. Get real and stop applauding to the "paid" real estate journalism. Why should it matter to you that the index of after-tax annual income to house price ratio is in US around 3, or Britain 5.1. You live in New Zealand and housing is even more expensive. Fresh air has its price or similar. If you want to get onto the property ladder start saving, get a better paid job and do some part-time work. It won’t get better as it is. Good luck.

Klauster

Renters tell me that they prefer renting for flexibility reasons. I talked already about “Does renting gives you more flexibility than owning a place?” In these discussions I often sense a lack of commitment.  If you own your family home or an investment property you are committed to keep your property well maintained and pay your mortgage. For renters is it convenient to call the landlord, if the water tap is dripping – right?

Flexibility is a mindset. If you keep your property in good conditions and upgrade your house within your lifestyle standards then your property will be desirable for other people. And you maintain a high re-sale value. High re-sale values attract buyers who look for good properties to live in.

How to keep the re-sale value high?

In most cases when walking along the street you can identify a proud homeowner’s property. Looking at the front garden, drive way, cladding, roof and windows tell you everything. These are the areas to maintain a high re-sale value.

Consider this:

• Quality maintenance and repair saves money on long-term, short-cuts often cause hidden damage.
• Faulty by design houses lose substantial re-sale value. Leaking homes are a good example.
• Keep up with renovations and lifestyle trends such as solar technology, thermo insulated walls and windows, etc
• Do online checks on trades people you hire and research about proposed solutions or materials. Don’t trust blindly a “Silicon Fix”.

To summarize, if you own a property in a desired area and maintain a high re-sale value, you will be flexible to sell your home at any time in any market. If you enjoy a comfortable lifestyle in a warm, energy efficient home with indoor-outdoor living and landscaped garden, you can be sure that other people desire that lifestyle, too.

Let me tell you a quick story;

Shortly after moving into my current home I started renovating and people asked me “Do you want to sell?” Much later I understood the question, because where I live people used to renovate before moving out to sell.

TIP: As buyer I am very inquisitive when inspecting a fresh painted house and you can guess why.

And by the way, life is unpredictable because of career changes, health issues, family and relationships. That is why it makes sense to be prepared by keeping the re-sale value high – would you agree?

Good luck

Klauster

Apartment ownership can be attractive because as homebuyer or investor you can start with a small budget. That trend is also supported by changes to the labor market structure. These days’ people move from place to place in search of work and with that they require a good place to stay for a while. Singles and couples who following a career path are often not interested in owning a family home yet, hence it is sensible to set priorities and apartments are attractive as alternative to rent or own.

Often and especially in a downwards moving housing market apartment owners experiencing unexpected problems causing a financial loss. Let me summarize three common reasons why people losing money;

#1 Purchasing a brand new apartment

Many buyers who bought a brand new apartment and trusted the figures presented on leaflets facing in the first year of ownership lots of frustration to fix faults and operational issues with the Body Corporate. In many cases at the end of the first year the Body Corporate faces financial problems because the first budget has been underestimated by the developer (seller) to make it more attractive and to persuade buyers.

That hits twice because the unit holders have to pay for the deficit and Body Corporate levies for the second year need to be adjusted. In a recent case the Body Corporate levies increased by 42% in the second year. That can easily put you in a negative cash-flow situation. That does not happen in a second-hand apartment and still you have the potential to add value through renovations for increasing the rent.

#2 Depending on a property manager

Apartment investors tend for simplicity reasons to engage a property manager for the apartment management. That works when the rental income covers all expenses. But consider this - property managers tend to under-rent to get easy tenants. Here apartment investors miss out top Dollars and pay at least 10% management fees plus administration fees on agreed services. If lucky with a good property manager people often let the building run on its own, rather than pushing the property manager for making the investment more profitable. It is obvious who loses money.

#3 Accepting a passive Body Corporate

Two groups of apartment owners lose most; these ones who can’t deal in person with Body Corporate issues because of distance and those who passed on there duties to a property manager. You need to realize that property manager and Body Corporate Secretary are paid by the apartment owner but they just do a job. If they do more than they work for their own business and charge you for it.

On the opposite when apartment owners get too comfortable with their agent they stop paying attention to what causes costs in the first place such as increases in consumption by faulty devices, damage repairs, etc.  I have seen electricity consumption twice the amount to the previous year but passed on to be paid by the Body Corporate. Lots of expenses for damage or vandalism and late detected faults can be avoided by pro-active management. Outsourcing services is a good way to streamline business expenses but often introduced with opposite effects for unit owners responsible to fit the bill.

In a recent example it has taken 15 months to remove an ineffective working Body Corporate Secretary. 30 unit title holders had to pay additional 15,000 Dollars to compensate losses above the annual budget.

Finally and in addition to operational costs as apartment owner you have to develop a long-term view in accordance with The Unit Titles Act 2010 that regulates the conditions for maintenance fund, contingency fund and improvement fund. Because - that money comes out of your pocket. Now think again – if you want to manage your apartment on “auto-pilot” – be prepared to pay the price or get involved.

For the interested reader who missed related articles, please try it here

• Landlord / Investor - Buying apartments off the plan sucks
• How to stop losing money when buying investment apartments

Good luck.

Klauster

Prone to lose money on apartments are people who buy for simplicity reasons, do not want to be involved and prefer investing in property with “clean hands” but also first-time buyers who go onto the property ladder with a small budget. Usually both groups have little experience in properties and therefore are an easy target.

In contrast experienced apartment investors only buy on three simple rules:

• Must not be leaky or have any outstanding remedial work,
• Size must be 50 sqm or more and
• Purchase at bargain price below valuation.

If you breach one of these three simple rules you risk losing money on apartments.

What must the due diligence process include to avoid pitfalls?

Apartments require special consideration before signing the Sales & Purchase Agreement because the due diligence process is much more complex than buying a stand-alone property. For supporting a purchase decision compare your investment with the apartment market, find out about related costs and calculate the expected cash-flow.

1) Watch the apartment market closely and compare

Look at the market rent, compare the price per sqm and find out the vacancy rate in the apartment building. At inspection identify the purpose for that apartment; cheap built rentals differ from residential city apartments. Look at noise transfer between units, quality of the common areas, heating and ventilation, hot-water system; identify material and likelihood of problems that might be an issue in future. Often underestimated is the “culture” in that apartment building and its impact on price and resale value. If the building comprises small studios expect a different investment result to a complex with residential 2 and 3 bedroom units. 

2) Watch expenses

The recurring expenses like insurance, City Council Rates, Body Corporate Levies and hot water can be provided by the vendor.  For  the expected costs regarding maintenance, repair and long-term funds you have to read the Body Corporate meeting minutes, AMG protocols and look at the repair history.

For inexperienced buyers it can become a quite costly experience if they don’t check whether the building has a current "building warrant of fitness" and any outstanding remedial work or not. This information inclusive the weather tightness history you can obtain from the City Council records.

3) Be particular when calculating your cash-flow

Your net yield (rental income minus all expenses) must not be below interest rates and should not be below the average interest rate. If you can’t create a buffer zone between the current expenses and the expected increase that includes insurance premiums, Body Corporate Levies and local City Council fees you could end up with a negative cash-flow on your investment.

Especially for brand-new apartments with no history the first budget is often very optimistic to make them sell easier. The wake-up call at the end of the first financial year can be costly – so ask questions and be certain before you sign the contract.

For the interested reader the next part of this apartment series answers the question - what are the reasons that apartment owners lose money?

By then good luck.

Klauster

Listen to the agent - Buy off the plan, pay a deposit, wait for two years and settle with capital gain, or sell by making profit, right? Wrong! Being upfront with you – buying off the plan is not investing I call it “speculation”. Yes, some people have luck, like playing LOTTO but when buying off the plan you breach three property investor’s rules:

1) Never trust the promotional figures painting a rosy picture in future. Actually, nobody can predict the economic future years ahead. Remember, who has predicted the credit crunch, Japan's tsunami or Canterbury’s Earthquake? 

2) Never buy a property that can’t be checked in terms of building standard, quality and value. Or do you think the leaking house crisis is over because of a changed building code and by using instead of untreated timber nowadays treated timber?

3) Never enter a business relationship with a ”body” that doesn’t exist. Recall, an apartment building is owned by a Body Corporate that will be formed by the future unit title holders not by the developer who sells for profit.

Why people buy apartments off the plan?

In most cases investors are attracted to apartments for cash-flow reasons. Brand new, warranties, no repair costs - right? Wrong! I will show you why. On glossy leaflets buyers are lured by amazing yields. Gross yield, net yield who knows. Also fictional “values” might be attractive, too.

What is the value for something that does not exist?

Well, the agent has some valuations on hand, for some of you quite convincing.  But you as experienced investor already know that residential and commercial properties are assessed differently on yield or cap rate. For me the question would be is the value on paper the commercial or residential one? The commercial use of an apartment building could be as holiday apartments or more commonly short-term rentals like serviced apartments, student flats, rent by room, etc or residential inner city apartments, penthouse apartments etc.

Around apartment buildings there is a grey area when it comes to estimate the value because one building can be classified commercial or residential depending on the occupants. I make up my mind by looking at the size of apartments in square-meters and the percentage of owner-occupiers. Owner-occupiers live definitely in residential properties. If you can figure out this question you get easily the value by dividing the annual rent by the yield or the cap rate. I suggest adding to this article another one to illustrate how you can do your due diligence to obtain these numbers. (I'll do that.) At the end the cap rate or yield indicates the potential how much income an apartment will produce. The rule of thumb: 

 Higher Income = Higher Apartment Value

What else can turn your “off the plan” project into a nightmare?

The short answer: not anticipated costs and building management issues related to rule 2 and 3. Projects I am familiar with have cost buyers a fortune after the first 18 months of settlement – Why?

Because of two reasons: Firstly for an unexperienced apartment buyer is it quite complicated to separate the signed Sales & Purchase Agreement with the developer and the operational issues with the Body Corporate. And secondly after getting the picture, in most cases it is too late. The first year after settlement is hard to get everything sorted and after that the bills keep coming in. In cases I know the Body Corporate Secretary is a company engaged by the developer, and they usually pass on everything to the Body Corporate.

The settlements in a brand new apartment building are always somehow exciting. I talk about frustrations about delays, operational problems and fixing quality issues. The Body Corporate Secretary is busy which results in delays forming a Body Corporate Committee. The first year is so quick over that everybody is amazed about huge bills for damage and repair of common areas, false fire alarms, etc. Nobody is to blame, but the Body Corperate (unit title holders) have to pay for a shortfall.

Buyers purchased something brand new and covered by warranty - are you sure?

I have seen apartments with the code of compliance certificate, but apartment owners had to pay for the bench top replacements in kitchens within the first two years because of water damage, appliance repairs within the first year of settlement and so on. At this point buyers did not know of restricted warranties. Developers often enter bulk orders and commercial deals with conditions where the time is ticking before the installation.

As you can imagine these three rules above can cause lots of spin turning your "off plan" investment into a money eating monster. Probably you got the idea what can go wrong when speculating - that really sucks.

For those who are interested in information how to do due diligence on apartments and avoid pitfalls, watch out for the next article to manage apartment risks.

Until then - Good luck.

Klauster

I read the other day few articles about the “crash” that we will face over the years to come and discussed by economic forecasters like Harry Dent. He said that the “crash” looks like to hit the world markets. The predictions are that the downturn will spread from Europe to the US, China and Asia.

Well, predictions about the end of the world have been made and recorded in human’s history since the begin.  Regarding the housing market in New Zealand the predicted downturn was 30% of property values. Now on the bottom of the market New Zealand is probably one of the safest places on earth to survive the “crash”. Possibly the internal problems are far more serious to be concerned of.

Interestingly “Gold and Silver are going to crash” Harry Dent said – but my concern are more the printed “Paper-Dollars” and would you go along with that? By the way people in New Zealand have so plentiful resources available (still not fully utilized) to make life better, land, wind and sun are available – just do something with it – right?

It also needs to be understood, living in a lucky country comes with a price to be paid. Look at the strong Kiwi-Dollar and the inflation pushing up the price developments. And not to miss the rising interest rates, rent increases and new taxes are still to come.

How can you minimize the impact on your personal life?

Following article illustrates what you can do, read here more.  If you understand the opportunities currently on offer you will be in few years time a very lucky person that made dreams come true.

Think about it – it’s your life.

Klauster

I agree with you my chosen headline is grossly overstating the situation because what happened in the housing market is a reflection of the economic impact that started with the financial crisis, held back economic recovery and the recent natural disasters on top of the “highly political” housing crisis. As visible results builders don’t build new homes and the housing market hasn’t shown any significant signs of recovery.

People still loosing jobs and without financial security taking on a mortgage is a risk. That is widely understood, but why are people so anxious about property values? We know the housing market moves in cycles. What goes down does go up, right?

Think about – the discussed property values in the media are nothing more than sales figures. Figures, what the current buyer is willing to spend. Your house might be worth less on paper, but does the value changes for you? You only lose money when you sell in the current market.

That is the answer to the above question – don’t be irritated by media’s headlines about home prices. Ignore the QV statistics in your letterbox about the paper value of your own home. You don’t need to sell – It's just fine.

Enjoy the value of your home – it’s dry, warm and comfortable,

Klauster

Not many years ago I paid $0.62 per liter of petrol. Guess the price from yesterday; Believe it I paid more than $2.21! There are similar stories with City Council rates, insurance and of course – the food prices, right? You don’t need to look at the crystal ball to figure out that the cost of living in New Zealand is on the way up so quickly that you won’t find an area with stabile prices. You know 2011 is an election year, very positively reflected in the media – but figure out what happens after the election!

Yes – we understand bad weather for farmers, earthquakes and destructions, oil crisis, etc. Even insurances running out of money, but we also paid over more than 20 years our insurance premiums. Where has all that money gone? The truth is - you can’t change the world economy and the inflation. These are the major price up drivers, but what is the take home message for you?

The message is simple – you can only change what is under your control, right? For those of us who already own something like land, a property, or a business - our living will improve more likely, because we can do something about. For those who haven’t thought about the exposure to price inflation, an investment is now becoming more important as it was before.

If you want to live on higher standards and comfortably in retirement, you will need to consider financial security very seriously. And the best way for most New Zealanders is to own a property. If you treat that property like an investment it will pay you back when cutting costs with DIY like

- maintaining a fruit and vegetable garden

- developing skills for doing repairs cost efficiently, and

- managing home improvements resulting in lower living and energy costs

Yes we know it takes self-control and planning. If you extend your home by adding a granny flat, an additional garage or sleep-out you can create “home and income”, rent it and it will subsidize your lifestyle. Again look at your crystal ball and consider your options to cut expenses or to create additional income. In my case the rain waters my garden, wind creates electricity and my solar panels make the best out of sun. Ask yourself - do I get paid as well?

If not – start now.

Klauster

Common knowledge is if you stock in times of plenty, you will have a better chance to survive days in need. It is even more important to plan ahead in good times when being focused on things you really enjoy. Being relaxed and working out your passion will open new income opportunities. Everything needs its time to mature. That is very true when working on new ideas opening a new income stream. As soon as you feel financial pressure, your focus changes and it is much harder to make good decisions.

As they say you win or loose in your head! For instance if you treat each decision as investment, looking at the return on each Dollar you spent your will change quickly attitude. And that is exactly needed to increase income. For instance it is a lifestyle changing decision to choose to install a solar hot water system or a new car. Still the sun offers tax free income or cost savings.

It is your way of life renting by increasing rent towards your retirement or working harder, paying off a mortgage and retiring in a freehold property. You could convert native land around your house into a fruiting oasis. Invest in a wood-burner if you get as tradesperson firewood for free, or what do you think about a wind turbine at your hillside?

You might realize I don’t speak about rocket science, basis principles are applicable everywhere. When choosing your new family home is the roof suitable for installing solar panels? Can you convert your hobby into something that makes you happy but also pays for your enjoyment or leisure time like doing handmade stuff? Keep your brain going until – yes - you found something that works for you and your family. The result makes you bigger, bigger as you are today.

Be pro-active – prove yourself

Klauster