A Yachtie's Guide to Personal Finance
Read more for a short overview of property investing

What about buying property?

A quick backstory

Hey folks, in light of the covid-19 induced stockmarket crash, I began to rekindle my flame for property investing. Although my belief in index funds and the stockmarket is still very strong, I would like to further diversify my investments to protect against downturns.

I had began looking into property investing about 18 months ago but decided against it for several reasons. Primarily though, I felt a property purchase would ‘tie me down’ and restrict my freedom & flexibility.

I was afraid I’d be tied to a job if I bought a property

As I’ve continued my research and engaged many property professionals, I began to realize my preconceived ideas about property being an ‘anchor’ and tying me down were totally incorrect.

The key to maintaining my current lifestyle of travelling and working at my discretion was to find cashflow positive properties. Put simply, this means the rent must cover all expenses (Insurance, power, water, etc).

See, my current goal is to find a cashflow positive property so I can continue to live my life how I like. My fear with property was I’d have to always have a job so I could pay my mortgage etc. Yet, if I could find a cashflow positive property, I wouldn’t have to be tied to a job as the property would take care of itself.

Having said that, as I am finding out, is a difficult task in New Zealand, where I am from. The housing market in NZ is already so inflated & overpriced that cashflow positive properties are far and few between. I’ll talk about all that another day though, today I’ll get into some pros and cons of property investing how I see it.

Benefits of property

Many yachties I talk to have a keen interest in property, whether it be for investment purposes or their dream home. In-fact, more yachties are interested in property than stocks, in my opinion.

A huge component in the property vs. stocks debate is that property is tangible. You can ‘see’ your money in a property whereas stockmarket money is just digits on a screen which you have no control over.

Moreover, property generally increases in value overtime which is known as capital gain. Theoretically then, an investment property is paying for itself, providing you with a bit of cashflow each week AND is increasing in value over time, talk about a win, win, win situation.

Another benefit, which many property investors take advantage of, is the ability to add value. In property, this would come in the form of adding an extra bedroom, repainting the house or renovating the kitchen. Each time you add value to the property, the rent can be increased and the overall value of the property increases.

A common occurrence in the world of property investing, which I’m sure we’re all familiar with, is purchasing a run-down house, renovating it and on-selling for a much higher price (this is called house flipping). Although not the topic of this article, it nicely illustrates the adding value proponent of property investing.

Another massive advantage is the ability to use other people’s money (OPM), a.k.a the banks. Typically, a property investor would avoid paying full price for a property in cash when they could be using OPM. This is most easily explained by an example…

Say John wanted to buy a 300k house and needed a 20% downpayment. 20% of 300k is 60k, which John happily pays and subsequently becomes a home owner. In this case, John has only given up 60k to own an asset worth 300k. John has been allowed to purchase an asset more than he can outright afford yet will receive the benefits from as if he owns all of it.

This is not John’s house nor would it cost 300k.

In a perfect world, John’s property would have all expenses (including paying down the mortgage) covered by tenants and in 20 years time he has a fully paid off house and passive income. Had John purchased in the correct area, he might decide to sell the property for much more than originally bought for due to capital gains.

(Of course, it’s not as simple as that but you get the point, property can be a great investment).

Lastly, owning an investment property means you could kick your tenants out and live there yourself, if needed.

This is just the top of the iceberg, many other benefits come with property investing, this is just a guide to kickstart interest.

The drawbacks of property investing

Being an astute investor means fully understanding the pros & cons of your investments. Below, I’ll run through some things to look out for when considering property investing.

Firstly, it typically requires a large upfront cost which immediately presents a barrier to some people. Depending on which country you’re buying in, a deposit can as much as 50% of the property value. Properties I am looking at cost about 300k and require a 30% deposit, you do the math.

Further, it’s a bloody process! You need to, or should atleast…

  • Spend hours online finding the right place or calling around
  • Go to open homes (if you can, if not, send someone on your behalf)
  • Get pre-approval from a bank
  • Deal with mortgage brokers and lawyers and accountants
  • Speak with real estate agents, property managers, builders, renovation experts, property coaches, engineers and councils
  • Thoroughly research your areas
  • Wait, wait, and wait some more, each process takes time.

Of course, once you have a system or a checklist this becomes easier but the first time round, it’s pretty hectic.

Also, what if you bought the wrong place? Perhaps you were mislead or ill-prepared and you purchased a dud which needed major renovations.

Avoid needing major renovations by doing proper due diligence (research)

Or, perhaps…

  • The area you bought in decreased in value
  • The tenants messed the place up
  • You hired a bad property manager
  • A natural disaster happened (2011 Christchurch earthquakes for example)
  • Your neighbor’s house goes to shit and brings down the value of your house
  • You lose your job and your tenant and the same time and can’t afford to pay the mortgage
  • An expensive unforeseen cost arises

… you get the idea.

Each of the aforementioned points can be remedied, however, with thorough research and strategy. It’s not an easy or quick process but once you make the first purchase and gain confidence, it’s a fantastic investment strategy.

Where am I in the process?

Well, unfortunately, my mortgage applications have been denied twice so far due to banks tightening their lending rules thanks to covid-19. Basically, banks struggle to view yachting as a stable industry and are generally hesitant of foreign income (I earn in USD and want to purchase in NZD).

An apartment here would but in budget if I wasn’t using a bank loan!

Having said that, I will keep trying as I’m confident I’ll eventually be accepted. I am ready and keen to purchase a house, I just need to use OPM (other people’s money aka bank loan) to do it!

I’ll write another article once I am further along in the process and if any Kiwi’s out there have any questions I’m pretty versed on the NZ housing market!

Here are some great links…

https://blog.andrewduncan.co.nz/how-to-buy-your-first-investment-property/

https://www.opespartners.co.nz/investment/property-investment

Mortgages for yachties: https://marineaccounts.com/mortgages.php

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