The Biggest Mistake Existing Property Investors Make

Are you asset-rich but cash-poor? This is very common for a lot of existing property investors who purchased before or during the last property boom and experienced significant gains in property values.

If we look back over the last 10 years, has the rental property (or properties) performed well for you? In general, the answer is going to be yes.

• NZ median price in January 2015 was $426,000
• NZ median price in January 2025 was $750,000
• That’s a $324,000 increase over the last 10 years, or a 76% rise

Many property investors will have seen their properties jump in value over the last 10–20 years, giving them huge equity gains. But there is a missing step – as an existing property investor, have you reviewed your rental properties for their current cashflow and future expected performance?

What is your cash return on your equity?

Real Case Study

• Property purchased: March 2006 for $420,000
• Debt still owing: $420,000
• Two dwellings: one rented for $480 per week, the other at $535 per week, totalling $1,015 rent per week

The picture below shows the actual cashflow for the year ending 31/03/25 of $(12,465) Cash Profit (Loss) before Depreciation and Income Tax, which was slightly affected by higher-than-average repairs. At current interest rates of 4.8% and using an average of the last eight years’ repairs, the expected cashflow would be a $6,438 profit before Depreciation and Income Tax.

Some property investors think this is great, as on Interest Only the property is cashflow positive when they move from 6.5% down to current rates of around 4.8%. But they’re missing the return on equity.

Return on $500,000 Equity

The property is now worth $920,000 (recent sale), so the investor has $500,000 of equity.

• Year ending 31/03/25: Cash Loss of $12,465, or NO return on $500,000 equity
• Once on a lower interest rate: Expected Cash Profit of $6,438 before tax, or a 1.28% return on equity

There is no perfect answer, but it is worth reviewing whether there is future potential or added-value options for this property. Or is it better to swap this underperforming rental for another property with greater potential and/or stronger cashflow? Or is the investor at a stage of life where they have enough equity and want to concentrate on other investments that provide better and more consistent income?

Summary

When you have low equity, property investment can be a great vehicle to utilise leverage and build your equity. But once you hold large equity, property still struggles to provide good cashflow.

Hopefully the above real-life example has made you think about your return on equity. Some great options from here could be:

• A Property Advisory Meeting with me to review your rentals
• A Financial or Retirement Plan from one of our financial planners

The key thing with property – or any financial decision – is to take your time and don’t rush. If you identify that a property is underperforming, it doesn’t mean you have to sell today. Instead, it’s better to make a plan: consider the best timing around tenancy terms, loan terms, the property market, seasonal factors, and any repairs that should be completed first.

Article by Ross Barnett 

This article is for general information only and is not intended as accounting, tax, or financial advice. You should seek advice from a qualified professional before acting on any information provided.

Any examples or figures are for illustration purposes only and should not be relied on for decision-making.