Is it possible to be an ethical property investor?
A lot of people look at property investment as a potential path to financial security and financial freedom, and understandably so.
Property prices have gone pretty crazy over the last few years. And in the proceeding decades before that, property has been a reliable investment for many New Zealanders. But at the same time, we've seen more and more bad press towards the property investment industry. It gets positioned as a pool of people who make it harder for first home buyers to get on the property ladder.
As rents go up, and housing in general becomes less affordable, this world gets a little bit murkier and trickier. And it's harder for people to understand whether it's possible to be a property investor, and still do it in a way that's good for society.
I coach a lot of people through this process. One of the first questions that a lot of younger people in particular ask is, "How do they go about investing in property, but doing it in an ethical way?"
First of all, it's so cool that people ask. And second of all, I think it is possible, and there are some steps you can take to do it in a good way. And I'm going to share those with you in this post.
Tip 1: Focus on buying properties that a first home buyer wouldn't want.
I think the issue with property investment comes around when it makes it harder for first home buyers to buy. In any society, we want as many people as possible owning their own homes. Because it gives security of tenure, it gives kids and families a safe, constant place to grow up.
It gives people consistency with schooling, and their communities, and neighbours, and that's got to be a good thing for young families. So when investors attempt to buy two to three-bedroom standalone properties in a suburban neighbourhood, those are the kind of properties that first home buyers are going to be trying to buy as well. And if you are adding your self to that mix as a property investor, you're adding demand. You're putting another offer in the mix, which, by definition makes it that little bit harder for a first home buyer to buy that home.
So my first suggestion is just stay out of that game entirely.
Focus on properties that first home buyers aren't going to try and buy.
What does that actually look like in practice?
Rather than a three-bedroom standalone home, you might look for two flats on one title, maybe two x two-bedroom flats side-by-side. You might buy a block of three one-bedroom flats. You could buy a home and income type property. You could buy a boarding house type property. These sorts of properties have other benefits as well. Namely, they provide you with multiple streams of income. If you've got three x one-bedroom properties on one title, then it's very unlikely that they're all going to be empty at the same time. That can be really useful as a property investor to help you manage your cashflow. Generally, these types of properties will give you a better yield (return) on the price that you pay as well.
If you've got three, one-bedroom flats on one title, you're usually not paying triple the rates and/or triple the amount of insurance, or maintenance as you would if you bought three individual flats on separate titles. So I'm a big, big fan of buying investor-style properties. And staying out of that first home buyer arena.
One added benefit is you'll have less competition to buy those properties because you're probably just competing with other property investors. So it actually saves you time because you're not throwing offers at properties again and again, and again, only to miss out. And that way you're not making it harder for any first home buyer out there to buy their first home.
Tip 2: Hire a property manager.
Have your investment managed by a professional property manager.
The number one thing any tenant deserves is to be treated fairly by the rules and to have all the right information that they need at the right time. Hiring a property manager is your very best way to achieve that. They know the process inside out. They know what steps to take when anything goes wrong, they know what has to be supplied to the tenant. They've got software to do inspections the right way, and to check everything and make sure it's okay. They've got software to check that the rent comes in on time and then they're not going to fall back, or forget to check something, or jeopardize anything that might affect your insurance later on.
In my opinion, a good property manager is worth their weight in absolute gold. Personally, I've tried managing rental properties myself, and I've hired a property manager. And now that I've got a good property manager, I would just never go back doing it myself. The cost of hiring a property manager is a deductible as an expense for your property investment business. And so it is a small expense, but it's thoroughly worthwhile. And in my opinion, is worth far more than what you pay for it.
Tip 3: Only buy an investment property if you can afford to spend money on it.
So I've seen this happen time and again, where people, feel like "I've just got to get an investment property, I've just got to get one." And they jump into it potentially too soon. And then don't have any money set aside to invest in making that property warmer, safer, drier, healthier, or just keeping up with maintenance. And this can be a real downfall.
Properties have things that go wrong. The hot water cylinder can break, the spouting needs replacing, or you need to spend money on it to get it up to healthy home standards - Putting in ventilation fans, or heat pumps, or more insulation. It's really important if you buy an investment property that you still have probably $10,000 - $20,000 set aside to spend if things need fixing. Not only that, you're going to need some money for your own home if you own that as well.
Tip 4: Don't go crazy with rent increases.
Property owners in New Zealand are in a really strong position. Even with recent changes to the tenancy laws. Tenants are often very vulnerable and it's hard for them to switch to a new property. It's really not easy out there to rent a home. So if you are a landlord, please understand that your tenants are in a tricky spot. Yes, rents do need to probably slowly increase over time to keep up with inflation but please try not to surprise your tenants with massive increases that put them in a tricky position.
If you buy a property that's under rented, have a conversation with your tenants about where you feel the market rent should be and how you can gradually move towards that place and try to make it a gradual change.
Tip 5: Don't have a glass half empty view of tenants.
It's easy when you follow the news to only hear about the horror stories and the things that go wrong. And I think a lot of property investors go into this world fearing the worst, thinking that they're going to get screwed over. In my experience, the vast, vast majority of people are kind, lovely, caring tenants who just want a nice warm place to live.
They'll pay the rent on time. They'll look after your property. They'll keep it clean and tidy. They'll be cooperative. They'll treat you with respect if you treat them with respect too.
If you go into this situation scared that you're going to get screwed over, it's easy to put that vibe across to your tenants and put them on the defensive as well. I think you have to go in expecting the best, with a glass half full approach. Trust in your tenants to do the right thing.
That's where hiring a property manager comes in as well. They are trained to do thorough background checks and to make sure that you're selecting the right tenants in the first place. That's where they add massive, massive value.
Tip 6: Respond quickly to any and all maintenance requests.
If your tenant gives you a bit of information, like: "Hey, look, your gutters are getting a bit blocked", or "this path's getting a bit slippery." Please don't look at that as a hassle.
That tenant is doing you a favour by telling you that there's something that you need to be thinking about and attending to.
Respond quickly to those requests, or if it's something that you don't feel needs urgent attention, at least give the tenants an understanding of when you're going to look into that further, or when you're going to review that situation. You might say, "We're not planning to clean the paths yet, but in three months time, we'll look at doing that."
Tip 7: Be real with your tenants.
Tenants are often scared to tell owners about an issue with a property because they don't want to jeopardize their renting situation. They don't want to be given notice or forced to go somewhere else or be seen to be difficult tenants.
You need to create a safe space for your tenants to tell you anything. If there's a bit of a drip in the tap underneath the bathroom vanity, you need to have your tenants feel like it's safe to tell you these things. That they're not going to be in trouble, That you're not going to be upset that they brought this to your attention. Because if you don't find out as soon as possible, this may lead to damage and issues later on.
Tip 8: Be flexible with fixed dates.
Most property managers and landlords will aim to sign tenants up to a 12 month fixed term tenancy, often set to renew at the end of January or the start of February.
This is fine for the landlord and the property manager because if their tenant leaves at the end of January, everyone else is looking for a property then, so it's easy to find a tenant. But it sucks for the tenant. If everybody leaves their property at the end of January, it kicks off this mad rush to run around and find something else. And that can put people in a tricky position.
It's also tricky if circumstances change for a tenant during their fixed term period. Say a family member passes away and they need to move home to a different city, or maybe they get a job offer in the middle of their fixed term and they want to move to a different town. Or perhaps they want to buy a home. If they're in the middle of a fixed term, that makes it really tricky because they might need to settle on the property they're buying in a month's time, but they're still stuck paying the rent on your rental until the end of January next year. Now, most people have provisions for this where, if the tenant pays for the advertising and the related fees, then you can find a new tenant to replace them (but they keep paying rent until that new tenant is found).
But I'd suggest to you, the nice thing to do as a landlord is, if you've got a tenant and they've been there for a while, and they've been good to you and pay their rent on time, and they want an early release from their fixed term because they're trying to buy a house. Just let them have it, just be nice. Understand that it's tricky if you're a tenant and you're trying to juggle these things. Understand that if situations come up where, maybe there's been a bereavement in the family and they want to move home to a different town to go and be with their family. Understand that you should just let them out of a fixed term without making it hard on them. Without saying, "Oh, no you've got to pay the rent until I find another tenant."
Let them give you three weeks notice or four weeks notice and let them go on their way. And you can find another tenant. That's how you can be, in my opinion, a good, ethical property investor. Yes, if you've got them in a fixed term, by rights you could make them pay rent until you find someone else. And you could probably make them pay advertising costs and other things. But is it the right thing to do?
Tip 9: Once you have a few investment properties, invest in something else.
I've met quite a few property investors who have amassed really large portfolios. Where they own, 20+ properties. In this day and age, once you've got three, four or five investment properties, your financial freedom is (I would argue) pretty well taken care of. Beyond that, you're just playing adult monopoly. And while that's arguably, okay (good on you for taking care of your retirement, and building family wealth etc), property is a finite resource. So every property that you own is a property that another young family can't buy, and can't get on a ladder with.
Once you've got three - five properties in total, including your own home, you might consider investing in something else.
Please understand I'm not a qualified financial advisor, but at that point you could consider investing in publicly traded companies, or startups, or forestry, or index funds, or any number of other options. You might even consider donating excess funds to worthy causes you are passionate about.
We all know from when we were kids playing the game monopoly with our older siblings or cousins, that once someone's got all the cards and they're obviously winning the game, it's no longer fun to play. So if you want to be an ethical property investor, don't go for a massive portfolio. Let other people get in the game as well.
Last but not least...
Don't lose sight of how lucky and privileged we are to be in a position to own investment property in the first place.