Private property issue #86 - Is it still worth investing in 2024?

Interest rates are high. So lots of investors ask: “Does property investment still make sense in 2024?”

One investor said: “With high interest rates and the rent we get, is it worth buying an investment property? Most of the time, we spend money from our pocket to cover the mortgage repayments.”

That is such a good question. You don’t want to buy an investment property and find it doesn’t give you a good return.

So, let’s dig into the numbers to see if it’s worth it.

How much does it cost to own a rental property? (What’s the cashflow like?)

At today’s interest rates, the rent doesn’t usually cover all your expenses.

So, you have to make up the difference by "topping up" the property out of your own pocket.

While interest rates are high, this is usually between $300 - $600 a week.

Doesn’t matter whether it’s new or existing. If you don’t have a cash deposit, Valocity estimates that over 9 in 10 investors top up their new purchases.

So it’s fair to ask – is spending that money worth it? Will I get a return? And how much might house prices go up in 2024?

How much will house prices go up in 2024?

No one knows exactly how much house prices might go up next year.

But getting a range of opinions can give us a sense of what might happen. Here’s what the main banks think will happen.

Westpac is the most aggressive. They think house prices will go up 7.7% next year. ASB is a bit more conservative. They say 2.5%.

The median forecaster says 4.9%.

So what would happen if you bought an $800k property in Auckland and it went up by 4.9% next year?

By the end of the year, it might be worth $839,200. You made $39,200.

To hold that property, you probably would have had to invest about $25,000 in cash to hold that property.

So you put in $25k, and if KiwiBank is right, you get out $39.2k.

That’s a 56.8% return on the cash you put into the property.

That’s massive.

Here’s what the returns would look like based on other bank’s forecasts.

What if ANZ’s forecast is right? House prices go up 5.8%. You've put in $25k and made $46.4k. An 86% return.

But if ASB is right, house prices go up by 2.5%. Then you put in $25k and get $20k back. So you didn’t make money.

This is the good and the bad of investing in property and using debt.

You can make massive returns because you buy a really valuable asset (a house). Then, you keep all the gains when it goes up in value.

But if property prices don’t go up, you can spend money and not get a return.

But it’s not the coin flip it might sound like.

What’s the chance that house prices go up?

Property prices can go up or down. But they go up more often than not.

Auckland properties have about a 70% chance of increasing in value in any given year. That’s by our number crunching.

And that chance appears to be better in 2024 since the property cycle is turning.

Property prices have already increased 2.8% since May 2023 (REINZ).

So, my view is that ASB’s 3-month-old forecast is a bit pessimistic. We’ll find out where their heads are at when they release an updated forecast within the next month.

So, is it still worth investing in 2024?

If Westpac’s, ANZ’s, BNZ’s or KiwiBank’s forecasts turn out right, yes. Investing in property could make sense for you.

A 57% return on the cash you put in seems like a good return to me.