Private property issue #97 - How much money can you make in property?

Property investors don’t always make money. That might be surprising to hear, especially from me.

After all, my business helps Kiwis invest in property. I’ve got an incentive to tell you it’s all rosy.

And over 10 years, it usually is. But that creates a problem.

To get the benefits of property investment over 10 years … you have to own the property for 10 years first.

Over that time, there will be (many) ups and downs.

Let’s say you bought this property 10 years ago. There’s nothing special about it. It’s just a random property I found for rent on TradeMe.

It’s 9 Fairgray Row, Vogeltown, New Plymouth: an average 3 bed, 2 bath property in a decent neighbourhood.

If you bought this 10 years ago, you’d have paid around $360k. It would have rented for around $390 a week. That gives a (pretty good) gross yield of 5.9%.

10 years later, you’d have made just over $400,000 from the house going up in value. Sounds great.

But here’s what the returns would have looked like each year. It's way more volatile.

Sometimes, you make a lot of money, like in 2016, when you would have made $52.4k.

In other years, you lost money. In 2022, you would have lost almost $45k as house prices fell.

Overall, the gains outweigh the losses. But it’s a bumpy path to get the gains.

There are three lessons you can take from this analysis

#1 You don’t make money every year

In the first year, your house went up in value by $19k. But you had to top up the property $3k. So you’re $16,000 better off.

The next year (2014), house prices increased slightly faster.

You made $28k from the house going up in value. However, you had to top up the property by $3k again.

So you were better off by $25k that year.

But the next year wasn’t so good.

Your house dropped in value by $1,000, and you had to top up the property by a bit more.

You lost $4,460.

And those bumps continue.

In the best year, you made $176k when house prices spied after the Covid-19 lockdowns.

Then, you lost $44.8k the next year as house prices fell.

So, if you invest in property, you need to be ready for the ups and downs.

#2 House price growth makes more money than cashflow

99% of the returns from this property were the house going up in value.

Only 1% of the net returns came from the rental income.

Deep down, most investors know that the bulk of the returns come from house price growth. These numbers show this is true.