It’s important to preface this by saying I will be discussing rental property in New Zealand in this article. From what I’ve heard and seen on various US personal finance blogs and podcasts, the property market over there seems to vastly different so what I say here likely won’t apply. Please refer to my disclaimer as well, where I will further attempt to extricate myself from the idea I’m providing any real advice 🙂
I should also note that we do technically own two properties: The one we live in here in NZ and the one my wife’s family lives in back in the Philippines. Believe it or not, this fact isn’t really relevant to a discussion about rental property as we’re charging far below market rent for the Philippines property and we don’t ever intend to use either property as an income stream to support ourselves in retirement, as per our retirement plan.
Ok, get on with the story Mr. R2A
It probably won’t surprise you to learn I’m not a huge fan of rental property as an investment. As much as that’s essentially heresy here in property-mad NZ, I’m not the only one. My goal for this post is to outline both my idealogical and just logical reasons why I don’t think it’s the best idea out there for investing.
Let’s start with the logic
I’ve only spent five months working as a property manager. That’s more than most people and less than most property managers. But it was enough to show me how rentals work in NZ. On the surface, most of the properties I managed would have looked like they were making a profit for their owners. This is because they refused to spend money keeping them up to scratch or improving them to a healthy and presentable standard and thus saved a lot of money on maintenance, although for reasons I’ll outline later they still probably weren’t making a heck of a lot of money.
I definitely don’t lump all landlords into this category. A decent chunk do invest in quality homes and keep them up to that standard. But I was shocked by the quantity of landlords who don’t. Owning a rental property is a difficult way to make a profit for the same reason owning your own home is a hard way to make a profit: Real estate has significant expenses. Rates (that’s property tax if you’re not in NZ). Interest on the mortgage. Insurance. Maintenance. Improvements (unless you want to attract increasingly worse tenants who will trash the place further).
It seems some landlords are fine letting their houses being run into the ground, because after all it is literally the ground itself, not the house, that is worth the most money. And this gets to the core of the issue with rental property in NZ. I’m not saying things will never change, but with the current state of rents and property expenses in NZ, the only real way to make money out of a rental property is to sell it. Thus the recent outrage about the potential for a capital gains tax.
I’m not going to go into all the numbers because other people smarter than me already have. But suffice to say most kiwis look at rising house prices and assume therefore that property is profitable. If you buy a house for $500,000 and sell it for $700,000 five years later, you’ve made $200,000 right? Well how much did you pay in rates over that five years? What about insurance? And so on and so forth. Compare with how much you would have made in the same time frame investing your deposit money in index funds to see whether all the effort of actually managing that property was worthwhile.
Now for the idealist in me to have a say
Obviously rental properties are an important part of society. Some people will always have to rent. Some people will always want to rent. Providing homes for other humans is a very important service. But I do take issue with the way this “service” side is often emphasised without taking any notice of the fact that there is also a “disservice” done to society when everyone and their dog is scrambling to invest in residential property.
The property market runs on supply and demand, same as just about any market anywhere in the free world. If more people want to buy houses, the price of houses goes up. That’s fair enough. But in a society like NZ where residential property is viewed as the only viable way to invest money by a crazy large proportion of the population by global standards, you get insanely high demand for property and thus insanely high prices.
Then organisations representing landlords have the gall to turn around and say any moves to change this culture and attempt to restore sensible house prices will result in a decrease in the supply of rentals and people having no place to live. This ignores the fact that many of those renting now would be able to afford to buy a house if prices were sensible, thus fewer rentals would be needed anyway. It ignores the fact that other countries manage to supply enough rental properties in markets where house prices are lower, the quality required of rentals is higher, and the populace have a culture of diversifying their investments instead of buying up rental properties.
But what my main issue with rental properties boils down to, in essence, is that every property I buy is one someone else who needs one can’t have. Every time someone buys a rental property, they’re taking it out of circulation. Sure, eventually they will sell it and put it back into circulation. And that time around hopefully it’ll be bought by someone who will actually live in it themselves.
The idea that the “kiwi way” is to own a rental property ignores the fact that basic maths says a maximum of 50% of kiwis can own a rental property as they need the other 50% to be their tenants. So the very premise of this “kiwi way” automatically puts itself out of reach of half of kiwis. How can we be ok with this? A true “kiwi way” for a society that considers itself egalitarian should be accessible to all in theory. I think we need to find a new way.
In NZ, we have declining home ownership rates. Home ownership isn’t the only way to wealth, but at the moment our superannuation system is essentially built on the assumption that kiwis are mortgage-free at 65, which is increasingly not the case. The only way to reverse the trend is for us to keep our sticky fingers off properties that come onto the market and allow people who don’t already own a home to buy them. But that’s unlikely to happen as long as we collectively, as a society, refuse to touch the sharemarket with a ten foot barge pole.
There are encouraging signs out there that things are slowly changing. Young kiwis, many giving up hope of ever owning homes, are starting to turn to other ways of investing. Over time this will lead to a change in culture around investment and wealth and may help to rebalance our economy, making it more productive again. Companies like Sharesies are sprouting up and making it easier for these young people to invest. Over a very long time, it will make home ownership more accessible to future generations, but sadly we’re talking decades on that one.
So to wrap up…
Rental property investment has it’s place but it certainly deserves much more careful consideration than most kiwis give it before diving in. This has been a long post! Well done if you’ve made it this far. And please feel free to share your opinion as I’m sure many will disagree with me, but remember to be nice 🙂
Comment Policy: For this blog, I’ve implemented a Comment with Kindness policy. You can read more about it here, but the gist of it is: Follow what I call the “Grandma Rule”. If you wouldn’t take that tone with your grandma, your comment probably won’t make it through moderation.