Tony Brazier

www.braziers.co.nz

Tony Brazier

The Press - Wednesday 12 August 2009

Analysing and Balancing Act

Analysing your investment property or portfolio is not always about just crunching numbers. Obviously this is part of it and requires the investor to either acquire this knowledge or pay someone else who has it. Although delving into how a particular property in your portfolio is doing is where we start, whole portfolio analysis requires a broader approach including investigation into the economy, percentage rates, migration statistics and demographics. It also requires the investor to ensure they are comparing apples with apples in their analysis (i.e. suburb by suburb or property category). Much reported data is of a general nature and can differ greatly for specific areas or property types. It is also often of a historical nature and in some instances takes three months to filter through, therefore decisions and dare I say at times valuations, can be made on statistics which could be best described as stale depending on how quickly the market is changing.

Let’s start with the property. In an earlier article called “Crunching the Numbers” (22 April ‘09) we discussed the ability to analyse by projecting forward what it is you think will happen over a particular period, then analysing your investment as though that had happened over that given time, (i.e. a discounted cashflow analysis). In order to do this an investor must have an educated guess at the likely CPI, capital growth, interest rates and likely expenditure needed during that time. In other words you need to get educated before you can analyse anything. Over reliance on formula you don’t fully understand is treacherous. Spreadsheets invented the saying “Rubbish in, rubbish out”.

To get knowledge on the economy, join the weekly email circulation of your favourite bank’s chief economist. Know what is happening in the interest rate market and general economy. The bankers will make broad comment on the market regarding last month’s median house price and interest rate changes and give the current migration figures as well. Keep an eye on the Government’s website on demographics www.population.govt.nz. This knowledge will also indicate whether the property type you have is likely to be full or empty in the future depending on whether it suits the needs of a particular age group whose numbers may be fluctuating.

Keep abreast of legislation changes with regard to migration and the needs of particular sectors of the population e.g. bad press in a foreign student group’s home country can dry up the flow of tenants from that area. Know the culture of the group you target and how that may influence their movements e.g. Chinese New Year delays those students from coming in some years causing concern that they may not turn up at all.

Know your building consent figures. For a year now they have halved causing a build up of demand that will show itself later this year. Watch for over supply. E.g. in the mid 1990’s the pending City Plan changes encouraged developers to build while they could, otherwise the densities were about to change. At the same time the government told us to do something smartly about our own retirement plans. So everybody bought new townhouses. What the buyers didn’t research were the demographics regarding the likely tenants. It happened that numbers were dropping like a stone. Lack of research into all of these aspects resulted in a ‘flat market for the late 1990’s which was totally avoidable.

Plot your various properties on a Risk vs Profitability graph. Aim to have two properties earning cashflow for every one that is negatively geared. If you are heavily weighted on the Risk axis buy older higher yielding properties or sell one or two of those not covering themselves. Sometimes changing what you already have (i.e. renovating) is much more sensible than buying again to balance your portfolio. Know the financial return of any improvement like insulation, heating, painting and carpeting. This can be the easiest way to balance your portfolio from negatively geared to positively especially when we are in a market where vendors are hard nosed and buyers overly expectant.

Finally, be careful of the mantra you invest by. “You make your money on the day you buy,” can cause you to only seek out vendors who are in trouble or properties that return way above average. We have seen too many investors find out the hard way why they got a bargain, when it finally came time for them to sell the same property. If no-one likes it but you, expect the same when you sell. “Buy on the low, sell on the high”. Most people get this wrong and it, once again, stops investors from buying what they like because the market is perceived to be at the wrong timing.

We believe you should analyse the market. Keep abreast of the economic, legislative, demographic, migration and housing supply information available. Decide on the type of property your portfolio needs to stay balanced and safe. When it comes up, buy it, regardless of the timing. Although all residential property can be rented it doesn’t always mean it is an ideal investment, and remember, “Time in is usually much better than Timing”.