Without the property investor having to daily ‘be there, at work,’ (at the building), passive income is money coming in, day-in and day-out. It’s called rent payment.

For a share market investor, passive income is also money coming in, day-in and day-out, without the share market investor having to ‘be there,’ at work. It’s called a dividend payment. There are major benefits to property ownership/investment:

• Ownership of a tangible asset, real estate – a property with a building on it;
• Most people can tell by inspection whether or not a property and building looks well built, well maintained and durable;
• The idea is easy to grasp. Buy a building – get a tenant, collect the rent;
• Generally, getting in or out of property investment is straight forward and usually without any financial losses;
• Because it’s an easy idea to grasp, most modest-sized property investors ‘manage’ their own rentals;
• Financial Institutions are usually keener to lend money on property than other forms of investment;
• Tax deductions are more readily available on property than on other forms of investment;
• While providing immediate rental income and tax deductions, real estate usually appreciates (goes up) in value.

Of course, those are a few simple points. There are also repairs and maintenance, mortgage payments, rates bills, insurance costs and so on, to consider.

Nothing is certain. Tenants may fail to pay the rent. Share markets may collapse. Buildings can be damaged. Individuals companies can have their share price shrink unexpectedly. The back-and-forth of the pros and cons of each, as passive income generators, goes on, endlessly.

While money management skills can be quite easily leant, attitudes and behaviours are often more difficult to tackle. They can result from deeply ingrained beliefs or experiences. It’s important to realise what beliefs one has about money so one can establish which beliefs need changing.
Money Fantasies

Many people will have some kind of fantasy about money lurking in their subconscious. A person’s brain can trick them into believing these fantasies could actually happen. However if one really thought about it , it would become clear just how silly they really are. Do any of these sound familiar?

• Lottery Living: Actually believing you might nab a winning ticket, and believing this every week.
• Marry a Millionaire: And that single-minded focus keeps a person both single AND broke. A spouse is not a financial plan.
• Waiting for a Windfall: Miscellaneous hopes for an inheritance, a bank error in one’s favour, a pot of gold in the back of the garage, etc.
• Thinking someone is going to pay a wage that’s waaaaay more than they should, enabling one to retire in two years.
• Sudden Success: Sell that screenplay or invent a new kind of peanut butter which will make one into a gazillionaire.
• Do What You Love, The Money Will Follow: The title of an actual book that has created financial disaster for everyone who followed its precepts.
• Ignorance Is Profitable: The crack-based notion that by not paying attention to your money . . . one day you’ll wake up RICH!
• Things Have a Way of Working Out: When clearly they don’t if you don’t do anything about it.
• I’ll Do It Later: Time has an uncanny ability of disappearing and you wake up 30 years later still chanting to yourself you have plenty of time and will do it later.
• Money is not everything. Right! Try living without it for a month.
• Denial. I am not that out of shape

Now at this point readers are probably laughing. But, if you think about it, at some point in time, at least one of these thoughts has gone through your head, or you’ve heard someone else say them. Sometimes people make these comments in jest to either themselves or others, but it could be just what’s really going on in their head.

The most important point is that every person is responsible for their own beliefs about money and every person has the power to change these beliefs.

Most of us think we’re financially stable, or at least able. However, thousands of New Zealanders were declared bankrupt in the last few years. Considering the strong economy during this time and the possibility that the economy may stall next year, consumers may need to scrutinise their finances more carefully.

No Safety Net

1. Derived from numerous information sources, you should consider these practices of people dangerously close to financial instability to make sure you’re not heading the same way.
2. Spending more than 20 percent of your net income on credit card bills.
3. Borrowing money to pay off other debts.
4. Paying your bills on time, but running out of cash between wage/salary payments.
5. Using your credit card to pay for necessities because you don’t have the cash.
6. Paying only the minimum payment on your credit cards. As a rule of thumb, if you can’t pay double the minimum payment, you’ve got a problem.
7. Getting turned down for a consolidation loan. It means you’ve already over-extended yourself — your debt equity ratio is too high.
8. Refinancing a loan to reduce your monthly payments on another loan. If you’re 24 months into a 48-month loan and you’re looking to refinance because you’re over-extended and need to lower payments, it’s a definite warning sign.
9. Needing a guarantor. If the lender requires a guarantor to make a loan to you, then you’re over-extended. However, if you lack a credit history, this wouldn’t necessarily apply.
10. Financing your vehicle for six or more years. You’re doing that to lower your monthly payment, rather than focusing on reducing your debt.
11. Consolidating your loans but not closing the accounts where those loans originated. You’re afraid to do so in case you get into trouble again. If you don’t close off those other loans, you’re simply going to compound your problem.
12. Counting on the next “big deal” to see you through your financial trouble. You need to look at the big deal as icing on the cake instead of ‘that’s going to bail me out’. This includes inheritances!
13. Carrying more than four credit cards. There’s no reason to have more than two credit cards. No matter where you’ll go they’ll accept one or the other.
14. Waiting until near the end of your credit card’s grace period to pay, or requesting a higher credit limit.
15. Hiding purchases from your family, or fighting with your spouse about how to deal with your financial situation. Financial problems and domestic problems go hand in hand, or vice versa.
16. Depending on parents and friends to bail you out.

If you’re engaged in two or more of these practices, create a budget immediately, detailing all bills, debts and income. When you go to the ATM machine and get that $20, allocate where it is going, right down to the last cent. You may then see that Oh my gosh, I spent $50 this month on lattes or $20 on ice cream.

For those still not sure whether to be worried or not, the single rule of thumb is: If you think you’re having financial problems, you are. If you’re waking up in the middle of the night, worrying about money, you’re already in trouble.

Procrastination is your enemy. Get on with your debt reduction servicing so you may then focus your attention on your long-term investment objectives.

The Location

• What is the zoning? Is it residential?
• Does the area have the amenities you need – shops, schools, transport, etc?
• Is the electricity, sewer connected?
• Are there any major developments going on in the area in the future – proposed motorway, shops, electricity corridor etc?

Land

• Is it free from filling, excess seepage of water, steep grading, dense trees, loose boulders, etc? If you are considering extensions, an engineer’s report may be necessary to access the land.
• Is it free from landslips or is it within a geothermal zoning area? Check with your local council and if necessary obtain a geo-technical engineer’s report.
• Check the lawns for puddles as these can indicate poor drainage.

Building

• Is the paintwork in good condition?
• Are the internal and external walls free from cracks & level?
• Are the roofing, guttering and down pipes in good condition?
• Is the building free from damp? Signs of damp, especially rising damp, are usually found around window sills, chimney-breasts, in ceilings and under floor coverings. Heavy condensation on windows can sometimes be a sign.
• Is the floor level and in sound condition? Using a marble is a good test for level floors. (An unlevel floor can indicate the need for foundation repair)
• Is the plaster in good condition?
• What sort of insulation do the walls and ceilings have?
• Does the house have good ventilation and natural lighting? Overgrown trees can cause dark and damp living areas.
• Turn on all the taps and check for water pressure, and that water drains away quickly.
• Turn on the lights to see if they are working. If they are not working, it may be just replacing the bulb or a more serious electrical problem.
• Check electrical wiring for condition. Many older properties were built with wiring which since install may show signs of degradation. Often power meter boards will be moved at time of repair. Always check with an electrician.
• Check number of power points and if they are suitably located.
• Establish exactly what is included in the price of the house – carpets, drapes, appliances, light fittings, etc.?
• Check that any appliances included are working: stove, air conditioning, heaters, and bathroom fans. If it has a fireplace, ask when it last had the chimney swept? If made of concrete does it show signs of cracking or does it have an internal chimney?
• Does the house have good storage?
• Will the house be expensive to maintain?
• Are doorways and passageways wide enough to move furniture through?
• EQC. Earthquake commission. Many types of council have requirements with regards to earthquake compliance. Factors to consider with earthquake compliance can be things such as multi level, age of building and construction type. Always check with your local council.
• What are the internal and exterior walls made of? Internal walls covered with scrim can be difficult to insure and be a hazard. Whilst exterior walls made of poorly constructed materials can leak or degrade quickly.
• Does the property require a warrant of fitness, fire sprinklers or council compliance certificates? Multi unit dwellings and boarding houses often require these types of regular safety checks and certification.

Bedrooms

• Will the bedrooms be affected by light and noise – are they close to a street, to street lamps, stadiums, airports, etc.?
• Are the bedrooms located so they are reasonably free from living area noise? This is often important in flatting situations.
• Is there sufficient ventilation?
• Is there a wardrobe or storage space? Will bedroom furniture fit? Does the passageway and stair cases allow ample room to move furniture into and out of rooms.?

Bathroom and toilet

• Is there sufficient ventilation?
• Is there an extractor fan to remove steam?
• Is the shower recess or bathtub free from leaks and sealed soundly?
• Is there a power point?
• Are there towel rails, cupboards, mirror?
• Is the toilet in good condition and does it flush properly?
• Is the floor and lower levels of vanity units in good condition?

Kitchen

• Are there sufficient cupboards for storage, and adequate bench space for preparing and serving food?
• Do the cupboards open and shut properly and is there room to add more?
• What is the condition of the stove? Is there an exhaust fan? Try the elements to see if they work.
• Will a regular-size refrigerator, dishwasher and/or microwave fit?
• Is there sufficient lighting and ventilation?

Dining and Living Rooms

• Will the furniture fit?
• Is there room for an extended dining room table?
• Are there sufficient power points & internet outlets?
• Is there heating? What type – gas, electric – and is it expensive to run?
• Does it have a TV aerial & satellite antenna?

Laundry

• Does it have a laundry tub?
• Is the hot water connected?
• Could a standard washing machine be installed without any problems?
• Is there room for a dryer?
• Does it have any cupboards or storage?
• Is there a floor waste (drain) or is the floor sufficiently graded so any overflow of waste can escape without causing damage?

Outside area

• Are the paths and fences in good condition?
• Is there a garage or carport? If not, can one be put on?
• How much maintenance does the garden require? Tenants don’t tend to be good gardeners.
• Are the lawns easy to mow?
• Is there a place to store lawn mowers, bikes etc?
• Can the grounds be improved? Landscaping can be a cost effective way to add value. E.g. creating an outdoor entertaining area or deck.
• Is there a pool? If so, does it comply with safety standard regulations?
• Is there plenty of off street parking? Is there space to lay pavers to park on?
• Have you checked the boundaries and fences are located on the legal boundary?

For someone on wages, when a customer leaves without buying anything because of the staff’s manner, or a lack of suitable product, there’s no immediate consequence to the staff pay packets.

But for a property investor, having a prospective tenant decline to rent the property because of the property investor’s manner, or because two windows are broken, there is an immediate consequence: no rental income, while the mortgage chews on.

Attention to detail is important. The pertinent laws often require many documents with precise items and language in them, especially with residential properties. NZ tenancy law is weighted in favour of tenants. Some speculate the reason is that property investors are in business, so have a greater responsibility than tenants.

Recording everything is important: expenses for repairs and maintenance items, rent received and in what form (directly into a credit union or bank account, or cash/cheque), receipts for cash payments, matters to do with bonds (if changed) and so on.

Computers with appropriate software and an Internet connection can make these tasks easier. Daily access to the credit union or bank account to check rent payments have been received is a modern technology boon for property investors.

Like many businesses, most everything can be done on a DIY (Do It Yourself) basis, perhaps more so when only one or two properties are involved. DIY covers everything from purchasing the property, obtaining a tenant, doing repairs and maintenance, to filing a tax return.

When or if the number of properties increase to the point where a DIY approach is not manageable, there’s plenty of people and companies around that will help with different aspects. A Property Manager is the most common, in such things.

However, there’s no need for an all-or-nothing arrangement. E.g. DIY everything except for using an accountant for the tax returns and a lawyer to prepare and execute the tenancy/lease agreements.

While there are Property Managers available to look after the routine aspects of tenants and property maintenance, utilising one does not free a property investor from all aspects of their business. Oversight of the property manager is important.

Liaising with a property manager does not mean interfering. It means being kept informed – both ways. A property investor should have a contract for service with the property manager and both should be sure of its contents and the obligations such a contract imposes on both parties. Being kept informed is of critical importance.

There is probably nothing quite so startling as a letter from the bank saying that no mortgage payments have been received for the last five weeks. Then the property investor realises that no rent payments have been going into the account (to cover the mortgage payments) and hurried calls are made to the property manager to find out what’s going on. “No surprises” is a good motto.

All businesses have their rewards and trials and property investment is no different. If ‘being in business’ is a scary thought, proceed with caution and lots of good advice from experienced people.