After a few weeks of uncertainty and poor activity levels immediately after Lockdown 1, Tauranga auction rooms are once again a hive of activity. Any sparks of a buyer's market emerging were quickly extinguished with the reserve bank lowering the OCR in March ... and here I was getting excited.
In the past few weeks, I’ve seen clearance rates around 50% with the majority of the remainder immediately going into post auction negotiation. Moving higher end homes and lifestyle properties seems to be more of an ask at present, but at the investor/first homebuyer level, competition is fierce.
It’s a similar story at open homes - social distancing is proving to be challenging when you’re faced with a dozen other parties lining the street before the agent turns up.
Multi income residential properties are selling in the 4.5 - 6% gross range, the spread is an indicator of the quality. These types of properties are a good target if you want to avoid the competition in the FHB price bracket, and still generate solid cashflow. Right now 5%+ gross is still achievable with stand alone homes in certain areas, but if last year's OCR drop was anything to go by, I suspect these will get thinner on the ground as the effect of lower retail interest rates are felt.
Do-up properties are out there, but in my opinion, we’re still suffering the hangover from over five years of renovation shows, as most sell with little to no margin for the woodbe renovator/trader. There are good deals out there, but good luck finding them if you’re not prepared to be at the coal face every day. The desirability of Tauranga has always made cashflow a tough ask, so the recent drop in lending rates has been a welcome gift to investors who are out in force, competing with home buyers for properties.
When you stop to think about it, the current activity levels are hardly a surprise. We have unprecedented demand and historically low listings. Money is cheap, if you can get it.
To put that into perspective, $500,000 of borrowing will cost you around $12,500 p.a. Median rent for a 3 bedroom in Tauranga is now $580 pw, or $30,160 p.a. If you assume other expenses of around $7,500 (rates, insurance, maintenance etc), that leaves $10,000 of positive cash flow to bank.
Then consider that the same $500,000 is likely to earn under $8,000 p.a in the bank, does not have the benefit of leverage, and worse still, is losing purchasing power every day. All in all, you can hardly blame people for wanting to put their money into bricks and mortar, or rusty iron and asbestos in the case of my last acquisition!
Then comes the inevitable question, “what do you think is going to happen to prices”. Well, I can 100% guarantee you that I don’t know, and neither does anybody else for certain. But, property is a long term game and over time, the property investor is exposed to both ups and downs in the market. The problem with trying to pick either the top or the bottom of the market is that in either case you won’t know for sure until after it has already turned - it’s about time in the market, not timing the market ... and right now with interest rates at record lows, those who are already in the market are enjoying the benefits.
The ‘secret’ is pretty simple - take action. Whether that means educating yourself to become a better or more confident investor, or leverage the services of others who have the experience to mitigate the risks and help you achieve your goals faster. If you desire the security and additional income of owning multiple properties for retirement income, waiting around for the deal of the century to fall at your feet definitely isn’t the answer!