In February of this year, we purchased an investment property with the knowledge that we plan to be travelling next year and Dave’s regular income and thus, the bank’s faith in us, would disappear.
I’m personally a fan of compact, efficient housing, located near to amenities and have aligned my property investment strategy around this.
Since I’m the chief decision-maker when it comes to our money, I decided that we are now only purchasing cash flow positive rental properties (one of my many real estate investment mistakes was not doing this in the beginning), primarily 2 bedroom units and townhouses close to the city centre in Christchurch, New Zealand.
I personally feel Christchurch is undervalued compared to other major cities in New Zealand.
I’ll probably change my mind a few times, but right now, that’s what we’re aiming for.
As we plan to travel, I want low-maintenance properties that are easy to maintain and can be managed entirely by a professional property manager. This post outlines my strategy for real estate investing moving forward.
I also want to achieve a minimum 7% gross return (although a current property we have under offer is just tipping over 6% but we have other plans for that).
Finding a 7% gross return in a central suburb is not easy, but it’s not impossible either. Here’s how it played out for us.
Real Estate Investment Case Study: Christchurch, New Zealand
Purchase price: $190,000
Weekly rent: $290 (annual $15080)
Gross yield: $15080/190000 = 7.93%
Council rates: $1389/pa
Home insurance: $1510/pa
Interest rate: 3.99% fixed for 1 year
The property is an upstairs unit, 2 bedrooms with a large living room, kitchen and combined bathroom/laundry.
It has a detached carport which has been filled in (walls and a door added) to function more like a single garage.
Here are some more images:
As you can see it’s a simple wee place but it gets great sun and is located close to the city centre.
When we first found the property, the vendor was asking $215,000. We weren’t prepared to pay that and walked away. A few months later the agent got in touch to tell us the vendor had reduced the asking price and put in a tenant paying $290/wk.
The asking price was $199,000. At this stage we were interested. We submitted an offer of $185,000 and ended up agreeing to $190,000.
Financing the purchase
If you subscribe to my emails you might be wondering what made me change my mind after deciding we were not going to invest in property any longer.
It’s simply this: the ability to leverage the equity in our home so we can borrow 100% of the purchase price.
A year and a half ago we paid off our very small and very cheap home (for now, we’ll rent it out when we travel).
This meant we purchased the property using almost none of our own money – except for legal and due diligence costs which were partly covered by a cash sum from the bank we borrowed from.
Now I know I could borrow a big chunk of change and do the same with shares, but I’m not sure where the share market is headed and I have faith in Christchurch property growing in value in the long term. In the short term, this property pays for itself completely, including principal and interest repayments on the loan.
It has a great tenant already settled in the home and looking after it and needs very little done (other than an external paint, as you can see). The driveway and drainage need repairing but that is earthquake damage and covered by earthquake insurance. The claim was assigned to us as purchasers and we are working through it with the other owners in the complex.
It fits my requirements for well-located, low maintenance and cash flowing nicely. I couldn’t not buy it.
Real estate as a store of wealth
This is a complete change of tune from the wannabe property mogul I was when I started to invest in New Zealand property from Australia. Back then, I thought that property itself would make me rich but as it turns out, I’m not cut out to be a renovator, flipper or a property developer.
I like to buy and hold. After reading The Millionaire Fastlane by MJ DeMarco, I made peace with not becoming wealthy from owning real estate.
It made complete sense to me that many rich people own real estate but most of them didn’t get rich from real estate. They created wealth through their own businesses and kept their wealth safe with a diversified portfolio of real estate and shares.
As my online business has grown, my income has skyrocketed. I’m now earning more money than I ever have in my life. And I need a place to put that money because frugal me cannot spend money just for the sake of it.
Throughout the year I’ve been contributing almost 100% of my profits to a global share ETF but I am wary of putting all my eggs in one (albeit highly diversified) basket.
Having a bit of extra debt to knock on the head has always motivated me to spend less, so taking on a mortgage for this property purchase has helped us mentally sharpen the pencil on our spending. Ideally, we’ll become debt-free on this property within 10 years.
As I write this we have put an offer on one more property. It’s in a similar location but a more modern and upmarket unit. If the sale goes through, I will be sure to create a similar case study.
Do you have any questions about this purchase?