Here's how New Zealanders get rich

Tuesday, 26 February 2019

Even retail boss Rod Duke is buoyed by a significant property portfolio.

Property investment is probably the closest anyone can get to a legitimate 'get rich quick' scheme.

It's generally not all that quick to begin with, but once the returns start rolling, investors increase their net worth at speed.

Success often goes something like this: You save a deposit to buy an investment property (or use the equity in your own home). You ride the wave as property values rise and give you more equity, or you renovate and add value to the place yourself.

You then use the equity in that property to buy another, then possibly another.

* Want to get rich? Buy a house (yes, still)

* Capital gains tax would not hold back property investment**

Sir Bob Jones is a Rich Lister thanks to property investment.

There are risks, of course. The market could tank and you could be left holding houses that are worth less than the mortgages you owe against them. You might have dodgy tenants trash the place.

But it's the main way that most New Zealanders get from 'average' to 'pretty well-off, thanks for asking'.

Of the top 20 people on New Zealand's rich list, almost half built their wealth through property investment.

Among them is Sir Michael Friedlander, worth $1.85 billion with an 'empire of office buildings, retail strips and industrial properties,' according to the Rich List.

Even Rod Duke, who is better known for his investment in retail business Briscoe Group, owns $50 million of residential and commercial property.

WHY?

Property is such an effective route to wealth because you don't always have to have a lot of money to start off with.

Mortgage adviser Glen McLeod said there was a 'direct correlation' between property investment and wealth creation.

Unlike shares, which you generally buy outright, you can borrow a significant amount against a property.

That leverage brings risk - if you had a 10 per cent deposit and prices fell 10 per cent, your money would be wiped out.

But it also amplifies gains. If you had bought a median-priced Auckland house in 2012 with a 10 per cent deposit, you'd have turned that $55,000 deposit into $300,000-odd of equity.

Economist Brad Olsen, of Infometrics, said people who hit major financial success usually did so via property or a successful business. But starting a business is less accessible to most.

'A small business is also a lot more intensive in terms of workload - you have to continue to innovate, otherwise you'll be left behind or a competitor will muscle you out, and to be fair you also need a dose of luck with business generally. Whereas with housing you can simply just sit there and watch it increase in value - in a growth market - after you've invested.

'The effort to reward ratio is a lot lower for housing, so it's simpler to invest and make good returns for limited effort compared to small business.'

He said many people felt there was more domestic control over housing than other forms of investment, such as buying shares.

'Housing is driven by local construction, bank lending and the like, whereas stock markets can shift based on sentiment and a critical news story.'

Olsen said the stock market crash of 1987 had influenced a generation of New Zealanders away from shares.

'They were uninformed about shares then and made bad investment decisions, are still uninformed about shares, but feel that they understand property much better, or at least feel they have better information or control over their investment.'

But investor Graeme Fowler, author of 20 Rental Properties in One Year, cautioned there was a lot to learn about investing. 'There are a lot of potential things that can go wrong. If you look at any product, service, industry, there are people that become multimillionaires through it and also those that don't do well or even lose everything.'

WEALTH CREATION

Mortgage adviser Glen McLeod, of Edge Mortgages, said there was a 'direct correlation' between property investment and wealth creation.

'The wise investor tends to know when to purchase and collect property. They also know when to develop and sell to continue to be able to grow the portfolio. Not every investor understands what is required to build wealth.

'I believe that property has been for a long time the best way to build wealth. When the market has dips and recedes, the investor can ride it out with time and continue to grow the asset value.'

He said the most important thing was to reduce debt and have strong cash flow to enable the portfolio to continue to grow.

WOULD A CGT CHANGE ANYTHING?

McLeod said he was unconvinced that a capital gains tax, as recommended by the Tax Working Group, would mean any fundamental change.

'It may just be a mindset change, and realising that paying tax on profit would now be part of the state rug. If losses are ring-fenced to the company that may yet offset any tax liability faced. I'm personally not a fan of CGT. I feel that if a New Zealander works hard to get ahead and builds wealth by working hard and taking a risk to invest in property and uses their income to reduce debt and see their capital value grow then those are the perks of working hard.'

Olsen said it should not be assumed a lack of capital gains tax was what had fuelled investment in property.

'Investing in property in New Zealand is often seen as a final nest egg people can invest in. It's viewed as more secure.'