I'm not saying most rental investments will turn out to be bad. The long-term trends in property prices have always been upwards, and I haven't heard anyone predicting that will change.
In the next few years, though, many rental properties are going to look disappointing. And whenever that happens to any type of investment, the foolish bail out.
They bought high, and they end up selling low - a strategy that will never make them rich.
It happened to many investors in New Zealand shares after the 1987 Crash. And it happened a couple of years ago to investors in international shares or funds holding those shares. They couldn't cope with big falls. They lost heart.
But wait, you might be saying, house prices don't fall nearly as far as shares.
True. But there's a fundamental difference between shares and rental property. These days, very few people borrow to invest in shares; almost everyone borrows to invest in rentals.
That means the property investor has to come up with mortgage payments. If interest rates
continue to rise, rents fall, or properties sit vacant for long periods, the investor might struggle to make ends meet.
Already, the market is turning.
"Growth in housing rentals in New Zealand has been lagging rising house prices for some time now," says Reserve Bank Governor Alan Bollard in a recent speech. "And thus rental yields in many parts of the country appear to be declining."
BNZ chief economist Tony Alexander puts some numbers on it. Over the past year, he says in a newsletter, "house prices have risen 22.1 per cent while rents have gained only 3.2 per cent."
And recently, in some regions, rents are actually falling.
A woman from a Nelson renting agency said on the radio the other day that landlords, desperate to find tenants, have been cutting their rent by as much as $50 a week. Other anecdotal evidence suggests Nelson isn't alone.
Certainly, there seem to be more rental properties out there. "An increasing number of (house) purchases appear to have been by those wishing to let the house on the rental market and expecting to make a capital gain," says Bollard.
While there are no good statistics on that, "our contacts in the banking sector confirm that a substantial part of the recent growth in housing credit has been for that purpose," he adds.
Or, as someone who emailed Alexander puts it, "Every time I look at the properties for rent, there seem to be more and more of them."
And it's not as if there are more and more tenants looking for homes. The strong immigration of recent years has slackened.
With supply high and demand decreasing, downward pressure on rents seems inevitable.
If you're a landlord facing falling rent and rising
mortgage interest rates, and perhaps watching the value of your property decline, how will you cope - both financially and emotionally?
There may well be financial steps you can take, such as extending the term of your mortgage. But will you lose heart, like those share investors?
As regular readers will know, I'm not a great fan of investing in rentals. But I would hate to see landlords bailing out when the market is down.
Resolve now that you will hang in there at least until the next property upturn.
