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Mom and pop investors fleeing property rental business

Mom and pop investors fleeing property as being a landlord gets too hard

Increasing numbers of mom and pop landlords are contemplating giving up on property investment and exploring alternative investments due to reasons such as the increasing pressure they feel from what can be a capital-intensive investment, changes to the legal environment (such as the Healthy Homes Guarantee Act 2017) and fears of how methamphetamine contamination could ruin their retirement planning.

CEO of New Zealand’s largest peer-to-peer mortgage lender Southern Cross Partners, Luke Jackson, says a string of inquiries about alternative investment options that don't stray too far from property have been received by his team in recent weeks.

“Interest in our offering has been growing steadily, with particular increase since the general election result. The feedback we’re getting is that small mom and pop property investors are becoming increasingly uncomfortable with the title landlord and the increased liabilities and obligations that this carries – they are in it to build a small nest egg for retirement.

“They have growing concerns around the costs they may face in making their investment properties compliant with new legislation, and they’ve heard a number of promises to tenants from the new Labour Government – particularly the promise to increase the no-reason 90-day notice to 180 days.

“Coupled with this are horror stories about methamphetamine use in New Zealand and the devastating cost it can visit on a landlord. While many of the changes mean that we may well see rent increases, actual rental yields aren’t expected to change. Some property investors are looking for alternatives,” says Jackson.

A significant factor for mom and pop property investors is that even with the slight relaxation in loan-to-value ratios this month (January) – when investors will be able to borrow 65% towards a property – it’s an investment that is still tying up more capital than what was historically the norm.

Previously, investors could recoup this with strong capital gains, but with a slowing property market investors are now unsure if any net gain will be realised. Coupled with low and stagnating rental yields, property investment is losing its shine for many.

Jackson says many of the inquiries are coming from baby boomers who say that they still need to ensure a liveable return from their investments which, rightly or wrongly, may rule out fixed term investments for many – particularly in light of New Zealand’s current low yield environment.

They know and understand property investment to an extent, but they say getting comfort around alternatives like the stock market, and its volatility, is challenging for them.

“Which is why we’re getting calls and why we’re gearing up to provide more education to potential investors around the subject of peer-to-peer mortgage lending. The concept of peer-to-peer lending is new to many, but they understand property and they don’t want to give up on it completely.

“In many ways it may actually be good news that property investors are looking at alternatives. It could mean more houses on the market for first home buyers and greater availability of funds for borrowers who want to get into those homes, especially because we understand the banks are facing their own liquidity issues, with the high cost of sourcing the longer term offshore funds and the increasing capital demands of their Australian parents,” says Jackson.

Southern Cross Partners, previously a contributory mortgage broker since 2009, restructured over a year ago to become a peer-to-peer lender – a lending matchmaker that brings borrowers and investors together and facilitates a residential property loan supported by a registered mortgage over the borrower’s property – after the Financial Markets Authority granted the company a P2P license last year.

The company sources borrowers through a network of mortgage brokers, and these are usually people who fall outside a typical banks’ lending criteria, even though they may have good equity to back their loans (for example, self-employed people).

Under the Southern Cross Partners model, investors invest funds in a loan which the investor owns (together with other investors who contribute to that loan), while SCP manages the loans. If no investors put their hands up to invest in a loan, SCP will fund and retain that loan itself.

“The process is completely transparent, and all the details are available,” Jackson says.

For more information about P2P investing (including the risks) visit http://southerncrosspartners.co.nz or contact your investment advisor

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