Property Investment NZ – The Epic How-To Guide

A Simple Guide to Property Investment 
By Andrew Nicol and Ed McKnight

Introduction

Introduction to this Property Investment Guide

If you want to learn about investing in real estate in New Zealand, this is the guide for you.


Our aim with this guide is to make it the most comprehensive, and actionable, completely-free resource in the country that teaches you how to invest in property. 


Over time we are going to develop it even further so that it is more comprehensive and interactive. That means including more videos, calculators, images and topics.


This is so you can continue to refer back to this guide whenever you have a question about how to invest in property. 

Chapter 1 – The 2 Main Strategies

Step One – Choose Your Property Investment Strategy

There are two tried and true property investment strategies that prospective investors tend to use. And the actions you’ll take depend on which strategy is in place.


The two strategies are – ‘Buy and Hold’ or ‘Buy and Flip’.


‘Buy and Hold’ involves investing in a well maintained (‘tidy’) property and holding it for the long term – making money as properties increase in value.


‘Buy and Flip’ involves investing in a property that needs some work, undertaking renovations on the property, and then either selling the property straight away, or holding it for the long term.


One strategy is not better than the other. They will both make money over the long term. The question is: which is the right strategy for you?


Strategy #1 – ‘Buy and Hold’ Property Investment 

‘Buy and Hold’ is the most common strategy property investors use in New Zealand. That’s because it is the least time intensive and the more hands-off approach to property investment.


This makes it accessible and realistic for everyday New Zealanders who have kids, jobs and busy lives. 


What the 'Buy and Hold' property investment strategy is

When you use a ‘Buy and Hold’ strategy, you’ll purchase an investment property, rent it out and then wait for the property to go up in value over time – a ‘set and forget’ approach 


You usually won’t do much else to the property, and renovations and maintenance are kept to a minimum.


Because of this you’ll want to find a property that is in good condition so you can avoid renovations and maintenance.


Why investors like ‘Buy and Hold’ property investment

There are three key reasons investors tend to like the ‘Buy and Hold’ strategy:


1. It is the least time consuming

‘Buy and Hold’ investing is typically a ‘hands-off’ strategy. This is because it doesn’t require you to complete maintenance or repairs to the property.


Because the property investors who choose the ‘Buy and Hold’ strategy are looking for a hands-off investment, they will bring other professionals in to help them manage the investment. At a minimum this usually includes a Property Manager who will look after and tenant the property for the investor (more on property managers below).


2. It is the most accessible

‘Buy and Hold’ investing is the more accessible of the two strategies. This is for two reasons. This strategy requires the least amount of upfront money/capital to get started. It also requires the least amount of background knowledge in the property or building sector.


Why?


Because when you execute a ‘Buy and Hold’ property investment strategy, you only need the upfront capital to purchase the property.


However, when you execute a ‘Buy and Flip’ you not only have to purchase the asset, you also need money to upgrade and renovate the property.


A bank won’t lend that additional capital to you, so you need to already have that money on hand, as well as your deposit.


This is why ‘Buy and Hold’ is more accessible from a financial perspective.


On the background knowledge front, to execute a ‘Buy and Hold’ strategy you only need to know how to identify the right type of properties to purchase and where to find them. 


Whereas you will need to know that and more to execute a ‘Buy and Flip’. For instance, you would need to know the types of renovations that will cost-effectively add to the value of the property; how to carry out those renovations, and where to source building materials.

 

3. It’s the least risky

‘Buy and Hold’ investing is also considered the least risky. That is for both of the reasons mentioned above.


Because a ‘Buy and Hold’ doesn’t require any additional capital for renovations less of your money is at risk when you invest in the property.


In addition, some properties that make great ‘Buy and Hold’ investments (like brand new properties) require smaller deposits from the bank to purchase. This also limits the amount of capital you have to risk in order to become a property investor.


Because there is less background knowledge needed to execute a ‘Buy and Hold,’ you are less likely to mess it up, or spend money in areas that don’t make the property go up in value. 


The drawbacks of the ‘Buy and Hold’ property investment strategy

The main drawback of following a ‘Buy and Hold’ property investment strategy is that it takes time for the property to go up in value. 


This is because you are relying on the market to increase the value of the property over time – which is a passive strategy.


‘Buy and Flip’ is more active and you have the opportunity to increase the value of your property more quickly in the short term. 


What it takes to be successful with the ‘Buy and Hold’ property investment strategy

1. Buy a property that is going to go up in value over time

Because 'Buy and Hold’ investors rely on the market to increase the value of the property over time, to run a successful ‘Buy and Hold’ you need to make sure that your chosen property is likely to go up in value over time. 


This means investing in the right location and type of property, which both have growth potential.

 

2. Ensure you can hold the property over the long term

Because ‘Buy and Hold’ investors rely on the property market to increase the value of their investment, you need to ensure that you can afford to hold onto the property over 10+ years.


This is because – depending on how your property is structured financially – your investment may require you to make a cash contribution into the property’s bank account each week. 


If that’s the case for your investment and you can’t afford to keep the property for 10+ years, then you may be forced to sell early. This would mean missing out on the gains that you wanted to achieve in the first place. 


Who is the ‘Buy and Hold’ property investment strategy right for?

Most New Zealanders will find the ‘Buy and Hold’ is right for them. This is because it requires no background or specialist knowledge, and requires the least amount of money to get started. 


Strategy #2 – ‘Buy and Flip’ Property Investment

While the ‘Buy and Hold’ strategy is the path the majority of New Zealanders decide to go down, the ‘Buy and Flip’ strategy is the path the majority of New Zealanders think about going down.


This is because it is the most publicised investment strategy – just think of all the renovation shows we see on TV and enjoy watching – The Block, Grand Designs and Changing Rooms.

And, to some degree, we’re probably inspired by other ‘turnaround’ shows like Gordon Ramsay’s Kitchen Nightmares and The Hotel Inspector.


Although, as good as the ‘Buy and Flip’ strategy looks from the comfort of our couches, we must respect the strategy and understand what it requires to be successful. 


What the 'Buy and Flip' property investment strategy is

When you use a ‘Buy and Flip’ strategy you’ll invest in a property that could increase in value with some building work, repairs or cosmetic upgrades.


Investors can then either resell the property immediately after purchasing, which is the ‘flip,’ or they can hold on to the property and wait for it to increase in value over time like a ‘Buy and Hold’ investor.


The main difference between the two strategies is:


  • How active you are in changing the property – doing work on the property vs not doing work on the property, and therefore:
  • The type of property you invest in – one that requires work vs one that doesn’t


Why investors like ‘Buy and Flip’ property investment

1. Immediate equity gain

Successfully executed, a ‘Buy and Flip’ strategy is the quickest way to create immediate capital gain (equity) within the property. 


That is because ‘Buy and Flip’ is an active strategy.


With this strategy, if you paint the walls on the inside of the property, or change the carpet you can increase its value relatively quickly.


If you are looking to rapidly create a portfolio – and want to be an active investor – then this is the quickest way to build the value of your portfolio, without having to save for another deposit (more on that below).

 

2. Personal satisfaction / thinking it looks good on TV

The other reason people think about going down the ‘Buy and Flip’ path is emotional.


As mentioned, we like the idea of painting a room, ending the day tired and covered in paint. It’s a bit of a Kiwi dream – being hard at work while imaging our future gains. 


One prospective investor once said to us: I’m more excited about transforming a dunger and winning Resene Renovation of the Year, than making money … although money is quite exciting”.

Although we may not all admit it, there is an innate romanticism about executing a ‘Buy and Flip’.

The drawbacks of ‘Buy and Flip’ property investment

1. Projects go over budget

Sadly, many (most?) construction projects go over budget and cost more than originally anticipated.


If you are executing a ‘Buy and Flip’ this has the potential to make the entire investment unprofitable or not worth the time you’ve invested.


For instance, if you invest in a property that needs electrical work, it can be hard to know exactly what needs to be done to fix any electrical error before you purchase the property. 


Once your tradesman starts work on the property they might find there are other, unanticipated issues that require more work, time and cost to complete.

 

2. Easy to mess up / higher risk

If you are not a professional tradesman it can be easy to mess up building works, repairs, maintenance, landscaping and painting yourself. 


Not only is there a risk that the work you undertake might not be completed correctly, but there’s also a risk you might ‘over-capitalise’ the property.


That is when you undertake work on the property and spend time and money in areas that don’t increase the value of the property.

 

3. Takes time and can be stressful

Most renovation projects require the investor to make many of the changes and improvements themselves. This is because without the investor’s own labour, many renovation projects wouldn’t be profitable.


This means that ‘Buy and Flip’ investors need to spend a lot of their own time, outside work, to make the project happen.


This often requires a lot of stress and late nights for the investor and their families.


Although that might seem fun when it’s other people doing it on TV, it’s a lot harder to do in real life.

 

4. Less accessible from a financial perspective

As mentioned, a bank will not lend you the capital required to renovate or ‘do-up’ a property. This means that you’ll need to have this cash available before you start this strategy. This is capital required above and beyond your deposit.


This means that a ‘Buy and Flip’ strategy is less financially viable for most New Zealanders to start.

 

5. You will usually need to buy a property in your city

Because the investor usually completes significant amounts of the repairs and maintenance themselves, it’s often unpractical for an investor to buy outside the city they live in.


This means they may miss out on better opportunities outside their home city.


For instance, investors located in remote areas or small towns can always undertake a ‘Buy and Hold’ strategy, because there is nothing stopping the investor buying outside of the city.


However, if they want to flip a property, they may find this difficult if there isn’t the right stock in their town. And in addition, it is likely to be impractical to travel and complete a renovation themselves in another city.


It’s not impossible, but it is less practical. 


What it takes to be successful with the ‘Buy and Flip’ property investment strategy

1. Find a property that you can add value to with your skills

The first step in a ‘Buy and Flip’ strategy is locating a property that requires the repairs and maintenance that you:


  1. have the ability and budget to fix/improve
  2. that when made will increase the property’s value.

 

2. Accumulate knowledge about the construction sector

You’ll also need some understanding of the construction sector so that you can undertake the repairs and maintenance required. If you don’t have this knowledge already, you can start learning. A few resources we recommend are the:


  • Property Investor Chat Group NZ – a Facebook group which has many investors who like to talk about how to improve an investment property’s value
  • Property Apprentice – a New Zealand property education company that educates New Zealanders (for a fee) about how to execute ‘Buy and Flip’ strategies themselves


Who is the ‘Buy and Flip’ property investment strategy right for?

The ‘Buy and Flip’ strategy is a good option for people with a background in construction who have the skills, expertise and background in completing renovations on homes.


It is also good for investors who want to be active and hands-on with their investments, and who have the time available to do so. 

Chapter 2 – Set Your Budget

Step 2 – Calculate How Much You Can Afford for Property Invetmet

To start investing in property, you need one of two things: 


  • You either need a cash deposit
  • Or you need to own your existing home (which you can use as your deposit).


There are some exceptions to this, which we will go through below. But generally, this is what you need to get started as a minimum.


The reason you need a deposit in property investment

The reason you either need a cash deposit or to own your own home is that most New Zealanders who invest in property don’t have the full amount of money to purchase a property outright i.e. if they want to purchase an investment property that is worth $500,000, they won’t have $500,000 in their bank account to spend.


That’s why they’ll need to get a mortgage/loan from a bank so they can purchase the property.


However, banks won’t typically lend an investor 100% of the money to buy the house.


Why banks won’t typically lend the full amount on a property – and how you can structure your investments so they do.

There are two reasons a bank won’t typically lend you a 100% loan secured against a single property:


Their own financial prudence

When a bank lends you money, you’ll need to make an interest payment each year (usually paid each month), which is what the banks charge for lending you the money to buy the house in the first place.


If you don’t pay the loan back, then the bank will repossess the property (i.e. they’ll take it off you) and will sell it so they can get their money back.


You would then receive any extra money left over after they have been paid back + any costs.


But, because the bank doesn’t want to lose any money, they require you to have a buffer within the property. This is in case the house sells for less than what you paid for it (or if it is sold at a discount because they need to sell it quickly, or the market moves).

 

Because the government won’t let them via the Loan to Value Ratio restrictions

The other reason is that the government generally won’t let them.


In October 2013 the Reserve Bank of New Zealand (which sets the rules that banks have to follow) introduced Loan to Value Ratio restrictions (LVRs).


These LVRs set requirements for how much of a deposit home buyers need in order to buy a home. That means banks can only lend so much for each property.


The reason the Reserve Bank did this was to make it harder for investors to buy multiple properties quickly. There was a belief that investors were causing the housing market to overheat, and the Reserve Bank wanted to slow down how quickly house prices were increasing (more on this below).

 

How much of a deposit do you need for property investment?

Because the Loan to Value Ratios set the minimum requirements for the banks we’ll start by looking at the deposit you require to be within the LVRs.


However, it is possible to work around these restrictions and purchase property with a lower deposit, which we will walk through as well.

 

The deposit you’ll need under the LVRs

The LVRs in New Zealand are currently:


  • 80% for your own home or holiday home, and
  • 70% for an investment property
  • It was worth $425,000
  • You had a loan of $340,000, secured against the property

 

What these mean is that if you are buying a property to live in, the bank can lend you up to 80% of the property’s value as a loan. This means that you’ll need a 20% deposit.


However, if you are buying an investment property, the bank will only lend you up to 70% of the property’s value as a loan, which means you will require a 30% deposit.


This means that if you are purchasing an investment property you need a deposit that is 50% bigger than if you buy your own home.


For instance, if you want to purchase a $500,000 property.


If it is a personal home, the purchaser would require a $100,000 deposit (20% of $500,000).


But, if the purchaser wanted to buy the property as an investment property, they would require a $150,000 deposit (30% of $500,000), which is 50% bigger.

 

However there is a catch – The 70% LVR rules do not apply to brand new investment properties.

This means that if you purchase a brand new property for investment purposes, you still only require a 20% deposit and the bank will lend you the other 80% of the property’s value.


Why would the government make this exemption?


Because New Zealand has such a large housing shortage, the government wants to encourage developers to build new properties.


By making it easier for investors to buy brand new properties, more investors will be encouraged to invest in them. This means that relatively fewer people will buy existing properties, which the government thinks will help reduce house price inflation.


The size of the deposit you'll need to invest, therefore, depends on whether you plan to invest in a new property or an existing property.

 

Again, if you were wanting to purchase a $500,000 house, if it is brand new then you will only need a 20% deposit ($100,000). On the other hand, if it was an existing property, you would need 30% deposit, which is $150,000.

 

So to figure out the size of the deposit you’ll need, you can either take the deposit you have available and divide it by 0.2 if you plan to invest in new properties, or you can divide it by 0.3 if you plan to invest in existing properties.

 

Alternatively, if you already have a property in mind, you can take the purchase price of a property you are considering and multiply its purchase price by 0.3 (if it is an existing property), or multiply it by 0.2 (if it is a brand now property).

 

Now, you might be thinking –

 

“What if I don’t have a cash deposit?” or, “Didn’t you say I could start investing in property if I had my own home already?”

 

We did and in the next section we’ll talk about how to find/create your deposit.

 

Finding your deposit for property investment

Right at the start of this article we stated there are two ways to fund your investment –

 

You can use cash as your deposit (this is the obvious way).

 

Or, the way most people find the deposit for their investment property is within their existing home. Let me explain – 

 

Over the last 5 years (from June 2014 to June 2019) the average New Zealand property increased in value from $425,000 to $585,000 – a $160,000 increase.

 

Say you bought a house in 2014 for your own use. Under the LVR restrictions you would likely have a mortgage of $340,000 (80% of $425,000).

 

This means that when you bought the property: 

 

You had a deposit of $85,000 within the property.

 

After you used your $85,000 deposit to purchase this asset (the property) you still have $85,000 worth of assets within the property.

 

This is called equity. It is an asset that you own, which is within the property.

 

The way to calculate equity is to take the value of the property and subtract the loans that are secured against the property.

 

One of the greatest benefits of buying property is that although you only have $85,000 worth of equity initially, as the house goes up in value you get to keep 100% of however much the house increases in value by. This is called ‘equity gain’).

 

Continuing with the example, say that your $340,000 mortgage on this property was for 30 years at an interest rate of 4% and you were making the minimum payment each month.

 

After 5 years (2019), your mortgage would have gone down to $337,500 (yes I know it’s not a lot, but that’s the facts).

 

This means that you now have a house worth $585,000 and a mortgage of $337,500. This means that your $85,000 deposit has grown to $247,500 worth of equity (an asset) within your home.

 

And the reason that all of this matters is that you can use some of this equity as your deposit when you go to purchase an investment property.

 

How to unlock equity within your home to secure the deposit for an investment property

Remember how we said that under the LVR ratios you can borrow up to 80% against the value of your own home?

 

Now that your house has gone up in value from $425,000 to $585,000, you can ‘refinance’ it.

 

This means going back to your bank, or your mortgage broker, and increasing the size of your mortgage – potentially up to 80% of your property’s new value.

 

The reason you’d want to do this is that by increasing the size of your mortgage, you can unlock cash within your home (‘dead money’ as we like to call it) and use it as the deposit for an investment property.

 

Because your house is now worth $585,000 (which is the average house in New Zealand), multiplying this by 80% means that you can get a mortgage of up to $468,000.

 

However, because you already have a mortgage of $337,500 you can only take out the difference between what you could potentially borrow and what you currently borrow from the bank.

 

This means that you could get an additional loan of up to $130,500 ($468,000 - $337,500).

 

This is how the average New Zealand homeowner can create a deposit of up to $130,500 to enable them to invest in property.

 

What you can do once you have unlocked equity within your home to create a deposit for your investments 

As we’ve discussed, what you are able to do with this new deposit depends on whether you buy a brand new or existing house.

 

If you were to buy an existing property, then you could purchase an investment property worth $435,500 (because $435,500 = $304,850 (70% loan) + $130,500 (30% deposit).

 

However, if you were to buy a new property then you could purchase an investment property worth $652,500 (because $625,500 = $522,000 (80% loan) + $130,500 (20% deposit).

 

What to do if you can’t pull together a 20% deposit

There are two things you can potentially do to pull together a deposit if you aren’t able to meet the 20% threshold.

1. Get creative with how you pull your deposit together

The bank will (almost) always require you to have a deposit for an investment property.

 

So if you don’t have cash or your own home, then you’ll need to get creative with how you pull together your deposit.

 

If you don’t have cash or own your home, then you may be a younger person (say under 35).

 

This does not stop you from becoming a property investor.

 

The most common way for young people to pull together a deposit for their first investment property is to tap into the Bank of Mum and Dad.

 

The Bank of Mum and Dad is a commonly used saying, but is often misunderstood.

 

It’s not about using your parents' income to buy you the things you want. Rather, it’s about using the equity within their home to help you buy your own home or an investment property.

 

This works the same way as the example above, where the existing mortgage is refinanced in order to create a cash deposit.

 

Just like the average house in New Zealand has gone up in value over the last 5 years, your parents’ home has likely also gone up in value in the period in which they have owned it.

 

This means there is likely to be equity within their home that you can use.

 

If this applies to you, your parents could refinance their home, giving the deposit to you as a gift.

 

Most parents and children then work out an agreement about how that money would be paid back (and the younger person would typically pay the interest on the increased mortgage that the parents have lent to them).

 

2. Work with the banks to get a different Loan to Value ratio

We’ve already discussed Loan to Value Ratios, but one important thing that wasn’t mentioned is that these restrictions don’t apply to all bank lending.

 

The rules actually state that no more than 20% of the banks’ lending can be to high-LVR borrowers.

 

That means that if you have a deposit, but it’s not at the 20% or 30% required, you can still get a loan, but you would need the bank to do it at a higher LVR. You would need to be in the 20% of the bank’s lending that is not restricted.

 

If you are able to secure one of these loans then you would be able to get a loan with, say, a 10% deposit.

 

The best way to get this sort of loan is through a mortgage broker.

 

Mortgage brokers keep up to date with the bank’s policies and understand how much of each bank’s lending is to high-LVR borrowers.

 

If you are in this situation, you should definitely talk to a good broker (and remember that most mortgage brokers are paid by the banks, so their services are free – more on that below).

Chapter 3 – Choose a City

Step 3 – Look For a City to Invest In

Now that you have chosen a property investing strategy and have an idea of how much you can afford to invest, it’s time to decide where you are going to invest.

 

Why you need to look at cities before you look at properties

The reason that residential property is such an attractive asset class is that it allows you to operate in two different markets:

 

  • You can achieve capital gain (increases in the price of your property) because you operate in the property market, and
  • You can achieve regular, weekly income from the rental market (which covers the majority of the costs of owning the asset)


Whether you undertake a ‘Buy and Hold’ or a ‘Buy and Flip’ strategy, both of these attributes apply (unless you are trying to flip the property back in to the same market).

 

Because this ability to operate in two separate markets is what makes property so unique, you need to ensure that the property you choose works well in both of these markets. That is:

  • It needs to achieve long term equity gain, and
  • In the meantime, it needs to achieve a reasonable yield (return) from the tenant to cover your costs

Because these are both market-led, you need to start, not by looking at specific properties, but in the market that you operate within. Both the property market and the rental market are primarily city based.

 

Why the property market and the rental market are city-based

The reasons both the property market and the rental market are typically city based is because of the same simple premise – if you choose to live and work in one city, you usually can’t ‘live’ in a property in another city.

 

This is certainly true for the rental market.

 

Looking at the property market – long term property prices are typically driven by the value of the land underneath the house.

 

And the value of the land underneath a house is primarily driven by the long demand for houses within the city the property is located within.

 

For instance, if you want to live in Auckland because you've got a job, or want to be close to your kids, you're going to buy in Auckland, or maybe Hamilton – at a stretch – but not Christchurch. So the property market is very closely tied to the long-term prospects of a city.

 

Why choosing the right city is more important than the right property

Let’s take another example to illustrate why it’s often more important to pick the right city – when it comes to capital growth – that the right property.

 

Say you find a great property that is well built, has 3 bedrooms, 2 bathrooms and a large section and it only costs $169,000.

 

Should you invest?

 

It depends … where is it?

 

If that property is in a tiny town like Patea (in South Taranaki) – which is where the actual property in question comes from – then the answer is likely to be “no”.

 

The reason is that you’re not likely to achieve much increase in value over the long term.

 

That’s because the town has limited population growth, high unemployment (11.2% compared with 4.2% nationally), and limited industry.

 

The town isn’t growing (sorry Patea) and property prices aren’t likely to go up either.

 

The fact is you need to choose the right market (both property and rental) that you want to operate in, and generally, this starts by choosing the right city.

 

 

6 factors to analyse when choosing a city for property investment

1. Historical trends – How has the market performed in the past?

The first thing to consider is how house prices have changed in the past. This will give a reasonable indication of how house prices may move in the future.

 

For instance, as mentioned, over the last 5 years the average NZ house increased in price from $425,000 to $585,000.

 

But in the West Coast region in the South Island, house prices only increased from $180,000 to $205,000 (2.6% annual growth) over the same period.

 

Whereas in the Bay of Plenty, house prices increased from $380,000 to $596,000 (9.4% annual growth).

 

There are obviously reasons why houses in the Bay of Plenty are growing much faster than those on the West Coast. And looking at house prices alone won’t give you any indication of what those reasons are.

 

But, what looking at house price trends will do is tell you where to start looking. That’s because the same factors that have made the Bay of Plenty so attractive over the last 5 years are the same long term factors that are going to continue to make it an attractive place to live and invest over the next 5, 10 or 20 years.

2. Population trends – checking the size of your future market

The next step is to look closely at population projections.

 

When you eventually come to sell your investment property you want to ensure that your property will have increased in price.

 

The main way that is going to happen is if there are more people wanting to buy properties in the future than there are now.

 

And the way to figure that out is by looking at the projected population for the city that you are currently analysing.

 

If you can find cities that are projected to have large increases in population, then it is a great indication that house prices will rise (as long as there isn’t going to be a disproportionately large increase in the number of properties built).

 

That’s what’s happened in Auckland over the last 19 years.

 

Between 2000 and 2019 the city’s population grew by 389,000 people – that's 25%, or the size of Christchurch. Over those 19 years property prices increased from $240,000 to 860,000 – 250%.

 

It took 19 years for Auckland to add the size of Christchurch to its population. That same level of population growth (around 390,000) is expected to be added to the city over the next 9 years.

 

That is why we believe Auckland house prices will continue to increase in the future.

 

3. Economic strength – Can people afford increased property prices

The other side of having more people in the city is ensuring that they have the income to be able to support higher house prices.

 

You might have a large population base, but if houses are unaffordable to buyers then there won’t be much room for growth in property prices.

 

There are two factors to consider:

 

  • Is there space for interest rates to decrease (which makes borrowing more affordable and means there is more room for property prices to increase)
  • Are there signs of continued job and economic growth (which makes incomes increase over time)

4. Construction trends – Will there still be a housing shortage in the future?

House prices will increase if there are lots of people who want houses, but there aren’t a lot of them to go around.

 

The previous three points have discussed how to predict if there are going to be a lot of people in the future who want houses.

 

Now it is time to consider whether there will be enough houses to go around in the future.

 

This can be hard to predict, as there isn’t a lot of hard data to directly look at. But you can get a sense of it by reading local papers and looking for: 


  • Articles about people struggling to get into the housing market
  • Articles that repeat the term “housing shortage”
  • Quotes from people in the construction sector stating that it is hard to build houses, that costs are high, or that councils are slow to grant consents


Two clear indicators that there won’t be enough properties in Auckland in the future are:

 

The failure of Kiwibuild

With all the money, resources and people in the country the government has shown how hard it is to build houses quickly in New Zealand’s major cities.

 

This is a clear indication that it is hard to rapidly add properties into the housing stock, which means it is likely there will continue to be a shortage of houses well into the future.

 

The government’s reaction to Ihumātao

If you’ve not been following the Ihumātao story, here is a quick summary. Fletcher Building bought a piece of sacred Maori land near Auckland Airport, which they want to build 480 houses on.

 

Protestors have occupied the land, protesting the build. The government has called a halt to any building work until all stakeholders have had their say and the matter is resolved.

 

This clearly shows that the government is prepared to slow down their response to Auckland’s housing shortage in order to hear from protestors.

 

This is indicative of a government who prefers not to take bold action on housing, which means it is likely to contribute to an ongoing housing shortage in the future, which will be great for investors.

 

5. Run KPMG’s magnet city checklist 

This part gets a little more intangible compared to the other metrics, but it is still useful.

 

In 2015, KPMG, a global consultancy firm, released a study entitled Magnet Cities.

 

They suggest that cities act like magnets – they either have a positive magnetic pull, attracting more residents and greater economic development. Or they have a negative push, driving people and investment away.

 

It is preferable to invest in a city that has a positive magnetic pull because magnet cities attract more people, and the right types of people who will make the city grow over time (what they call Young Wealth Creators).

 

It’s useful to use KPMG’s 7 principles of a magnet city as a quick checklist to evaluate the magnetic pull or push of the city which you are considering investing in. These are:


  • Is the city attractive to Young Wealth Creators who will start new businesses?
  • Does the city have constant physical renewal, is there a lot of development going on?
  • Does the city have a clear brand or identity?
  • Is the city connected with other cities, is it easy to get in and out of?
  • Are there new ideas within the city, or good quality academic institutions e.g. universities?
  • Are investors pushing money into the city?
  • Does the city have strong leadership in national, regional and local government (and other institutions)?

Ensuring that your target city has some of these principals will ensure that it continues to attract more demand for houses over time, and more demand from the types of people who can support higher house prices.

 

To explore this concept more, read how the 7 magnet city principals can be applied to Christchurch (which was specifically highlighted in the global KPMG Magnet City report).

 

6. Rental yields vs house prices – Making sure you can hold the property over time 

A big part of becoming a successful residential property investor is ensuring that you can hold the property over the long term so that you can achieve capital gains over time.

 

If you have to sell the property early because you can’t afford to hold it, then you’re going to lose out over the long term.

 

That’s why when analysing a target city, you should compare rents with house prices to ensure they meet your investment appetite.

 

For instance, Auckland currently has an average rent every week of $575 for three bedroom homes, but the average sale price for that type of property was $850,000. That is a 3.5% gross yield (accounting for no vacancy).

 

Whereas, Wellington has an average rent every week of around $600 for 3 bedroom homes, and the average sale price is $609,480. This is a 5.1% gross yield.

 

This means it is much more affordable to buy and hold in Wellington over the long term, not only because there is a cheaper entry price, but because there is relatively more income achieved each week to pay for expenses (and some expenses, like interest payments to the bank, are often proportional to the price of the property bought).

 

That doesn’t mean you shouldn’t buy in Auckland – it’s just that if you do invest in Auckland, you need to be aware that it will require more investment to get the capital gains.

 

Although gross yield isn’t always the most useful calculation when looking at a particular property (as we will discuss below), it is useful when analysing a city to invest in.


Chapter 4 – Choose a Property

Step 4 – Go Shopping For an Investment Property

Now that you’ve chosen a property investing strategy, you know what your budget is and you’ve chosen a city invest in, it is time to go shopping.

 

Now, imagine for a moment you’re walking into Kmart or Briscoes.

 

As soon as you walk in through those glass sliding doors, more often than not the first thing you look for are the signs that hang from the roof. You know, the ones that say “homewares,” or “bathroom,” or “kitchen”.

 

These signs help move your feet in the right direction, closer to the pizza cutter that you might be looking for on this particular occasion.

 

Now say those signs didn’t exist.

 

It’s going to take a lot of rummaging around, walking back and forth past the pillow section a million times for you to find the kitchen section, and eventually what you came in for – the pizza cutter.

 

Searching for an investment property can often be like walking into Briscoes for the first time, except instead of the signs not being there – you’re just not sure what they are, or what they mean for your investment strategy.

 

There are two main ways to break investment properties down into their different departments. The first is by the property’s type (standalone house, apartment, townhouse etc.), the other is by its age.

 

These are both important because there are different laws, regulations, expected financial returns and constraints that apply depending on which section you choose to be in.

 

That’s why the first two sections of this chapter are going to walk through what would be on those signs, hanging from the roof, if you bought investment properties at Briscoes.

 

The third and final section of this chapter will then go through where to find investment properties, which is a bit like giving you a map to the Briscoes of investment property store.

 

How to categorise properties #1 – Property Type 

When we talk about property types we are specifically discussing whether the property is a: standalone house, townhouse, apartment, piece of land with nothing else on it etc.

 

This is important as the type of property you invest in is going to have a large impact on the return you get over the long term.

 

This reason this is the case is that these property types differ in two key aspects:

 

  • The amount of land they have under them – which is the primary driver of long term property price increases (this is an equity producing asset)
  • The improvements/dwellings on top of that land – which is the primary driver of how much you can charge in rent, which pays for mortgage you use to purchase the land (an income producing asset).

 

Remember, the primary driver of the property market is the value of the land it operates within, but the primary driver of the rental market is, generally, more about the building that is on that land.

 

And the four property types we are going to analyse in this section differ in the ratio of how much land they have compared to the amount of buildings/improvements they have on that land.

 

For instance, apartments make great rental properties and generally produce high rental returns compared with their purchase price. That is because they have a lot of building on a small amount of land. However, they don’t tend to go up in value as quickly.

 

On the flip side, a standalone house has much more land per dwelling/building, and therefore will go up in value much more quickly, but won’t typically have as high rental returns.

 

No one property type is right or wrong. It is going to come down to which property type most closely fits with your investment strategy and current financial position.

 

With that, let’s get shopping. Here are the four most common investment property types in New Zealand with their relative pros and cons.

 

Standalone house – (also known as house and land package)

What standalone houses are

A standalone house, or a house and land package, is exactly what you think it is. It is the quintessential Kiwi home. It is a house that is not connected to any other houses, on a plot of land.

 

The benefits of investing in standalone houses

Increases in value quickly

Because standalone houses have a good amount of land, they will often increase in value more quickly than other property types.

 

A carefully chosen standalone house will typically go up in value at a rate of 5% per year (on average over the long term).

 

Easy to sell

Because most Kiwis are used to living in standalone houses they are relatively easy to sell. This is important because you want to be able to easily sell the property when it comes time for you to exit the market and enjoy the gains you’ve made.

 

Able to add value / renovate

If you are an investor focused on renovations and adding value, then standalone houses are the best option for you.

 

This is because you can usually add additional rooms to the house if needed, and you have the land available to build a deck or outdoor living space.

 

This also means that the property is likely to have a garden which can be landscaped. And you’ll have control over how the outside of the property looks (try convincing your body corporate to let you paint the outside of your apartment).

 

That’s why most investors who focus on renovations will choose a standalone house.

 

The drawbacks of investing in standalone houses

Lower rental yields

The rental return on a house and land package is not as good as other property types. That’s because you are purchasing relatively more land, which doesn’t produce as much income as the improvements that are on top of the land.

 

This might be an acceptable drawback for you if your strategy is to Buy and Hold over the long term, and aren’t as worried about the slightly lower cash return, or slightly higher investor contribution, if the property is negatively geared (more on that below).

 

Townhouses

What are townhouses

Townhouses are slightly smaller than standalone houses, and are typically built on a smaller plot of land. Often they are conjoined/attached to other townhouses and share walls with neighbouring properties.

 

Typically a set of 6 townhouses might be built on the equivalent amount of land that 2 standalone houses would require.

 

The benefits of investing in townhouses

Often centrally located

Townhouses are often built in centrally located areas. This is because developers often identify areas that will be easier to sell to people who want to live closer to the centre of the city and are willing to accept less space and land as the tradeoff.

 

This means that townhouses have already been located in good growth areas.

 

A mix of good return and long term capital gain

Because townhouses sit between apartments and standalone houses in terms of the ratio between land and buildings, they achieve a better rental return than a standalone property but still achieve some of its capital growth.

 

This means they are good options for first-time investors who want to access some of the capital growth potential that standalone houses have, while not committing to the same level of investor contribution (or accepting a lower return if the property is cashflow positive).

 

Lower entry price

Because townhouses are built on smaller plots of land and share walls with neighbouring properties in the development, they often can save on construction costs and are therefore more affordable to purchase compared with standalone houses.

 

This makes it easier for first-time investors to purchase townhouses and become property investors.

 

The drawbacks of investing in townhouses 

Body Corporate/Residents’ Association fees

Because townhouses share some of the same amenities, services, and infrastructure as the other townhouses within the development, they often come with a body corporate or residents’ association.

 

This is an entity that you need to pay money into each year (generally $1000 to $2000 annually). This pays for any of the shared services the development might have e.g. gardening or the cleaning of shared spaces.

 

This means that townhouses (and apartments, which also have a body corporate) have an additional expense line compared to standalone houses – although this is often compensated for through higher rental returns.

 

Less control over what you can do to the property

If your strategy relies on renovation, then townhouses may not be for you. Because townhouses are located within a development, the value of your property, and the quality of your tenants’ rental experience is somewhat dependent on what your neighbours do.

 

If the entire development is painted black and white, and then your neighbour decides to paint their house pink, that might negatively impact the value of your own property.

 

That’s why body corporates and residents’ associations will put rules in place to stop that from happening, which might include that every property has to have their lawns mowed or that your tenants can’t stack empty beer bottles in their windows.

 

That all sounds really positive. But the flip side for renovation-focused investors is that with these associations in place, what you can do to the outside of the property is severely limited.

 

That’s because you can’t change the cosmetic look of the property’s outward appearance, and because townhouses have only a small amount of outdoor living space, it is likely you won’t be able to add on to the townhouse or do any extensive landscaping work. This limits the amount of value you can add to a townhouse’s property price through renovation (relative to a standalone house).

Apartments 

What apartments are

Apartments are separate residences within one conjoined building.

 

Buying an apartment means you are sharing the whole building and its amenities with the other owners of apartments within the building.

 

It is slowly becoming more common for there to be two types of apartments in New Zealand:

 

Single Key

This is a standard apartment within a building – it’s what you think it is.

 

Dual key

Dual key apartments are a relatively new concept for our country.

 

These apartments have 2 self-contained apartments – each with their own entrances – but are sold under the same title.

 

The difference this makes for the investor is that dual key apartments often provide a very good rental yield, but will go up in value more slowly as there is a limited market when you go to resell them in the property market.

 

The benefits of investing in apartments

Higher yields

Because apartments are relatively cheaper to purchase, while still attracting good rents, they tend to have higher yields.

 

This means they are more likely to be cashflow positive compared to other property types.

 

Because apartments are high yielding they are a good option for investors who are nearing retirement and are more interested in cash now, rather than long-term gains in the value of their property.

 

The drawbacks of investing in apartments

Slower capital growth

Although apartments have higher yields, their values/prices tend to grow at a slower rate. This is often estimated at 3% annually (as an average over the long term), compared to 5% for standalone houses.

 

Body Corporate fees

Like townhouses, apartments have body corporates that manage shared services within the building and set the rules for the apartment.

 

This can be a drawback as it provides an additional ongoing expense that you still have to pay, even if the property is vacant and doesn’t currently have a tenant.

 

Less control over what you can do to the property

Because you are unable to alter the outside of the property, through landscaping or painting the property (think about it, you couldn’t just paint the outside of your apartment), there are a smaller number of ways to add value to the property.

 

This makes apartments less attractive for investors who are focused on renovation.

 

Land

What land is

When we talk about land in this context, we are talking about undeveloped land that has nothing on it – a blank site.

 

The benefits of investing in land

Goes up in value the quickest

We previously stated that it is the land a property is built on that goes up in value, not the house built on the land. That’s why land tends to go up in value faster than any of the property types discussed in this guide (in percentage terms).

 

The reason that’s the case is that 100% of your purchase price has gone into the land, and none of it has gone into the buildings on the land (because there aren’t any).

 

This means that investing in land is cheaper than investing in a property that has a house and land, and therefore will go up in value proportionally more quickly.

 

Lots of opportunities to add value

If you choose to build on the land, you can add a lot of value to the property very, very quickly. Adding a house might add hundreds of thousands of dollars to the value of the property.

 

Lowest stress

When you invest in land there are generally no tenants, no real maintenance that needs doing. So you don’t have to worry about doing anything to it if you are following a Buy and Hold strategy.

 

The drawbacks of investing in land

No Cashflow

Because you can’t rent out land (generally) to residential tenants, if you invest in land you probably won’t have any cash flow. This makes it much harder for everyday New Zealanders to invest in land because they’d have to service the mortgage they took out to purchase the land.

 

For instance, let’s say you invest in a $300,000 piece of land. You use a 100% mortgage to purchase the land at a 4% interest rate. That means that you will have annual interest expenses of $12,000. Added to that, you might have rates of $1,200 a year.

 

This means that you have total expenses of $13,200 per year or $253 per week.

 

Many New Zealanders probably couldn’t afford to pay this (since there’s no one paying rent).

 

Big downside if you choose wrongly

Because you will potentially have large outgoings each week, if you choose the wrong piece of land and it doesn’t go up in value as quickly as you want then there is a much bigger downside.

 

Say you have the decision to either invest in a standalone house or a piece of land.

 

The investor contribution you have to make to the piece of land each week, as we said, is $253 per week ($13,200 annually). The investor contribution required for a standalone house (at 100% lending) might only be $80 per week ($4160 annually).

 

This means that if you make a poor investment decision, and the property doesn’t achieve the capital growth you hope for, then more of your cash is at risk.

 

High cost if you choose to build

If you do choose to go down the renovation/adding-value route, you will need a lot more capital in order to build on the land. If you choose to build a house you’ll be taking on six figures of additional debt to build on the land, which comes with additional time and stress.

 

How to categorise properties #2 – Age

The other sign you might raise your eyes to look for when you enter the Briscoes of Investment Properties is age. This is primarily whether the properties are existing (already built and pre-loved) or brand new.

 

This section of the chapter will summarise the financial differences between existing and new properties and what they mean for investors.


New properties

What new properties are

New properties are homes that have either just been built, are in the process of being built, or will be built soon (for instance if a developer is selling off the plans).

 

The benefits of investing in new properties

More accessible to invest in

New homes are more accessible for everyday New Zealanders to invest in. Earlier in this article, we discussed that the Reserve Bank’s Loan to Value Ratio restrictions mean that investors need a 30% deposit to purchase investment properties.

 

However, these restrictions do not apply to new properties.

 

That means that if you have a $100,000 deposit (or can secure $100,000 against the value of your existing home), you can borrow up to $400,000 from a bank.

 

This means you can purchase a property up to the value of $500,000.

 

If you used the same $100,000 deposit to invest in an existing property, you would only be able to borrow $233,000 (70% of the property’s purchase price). That means that you would only be able to buy a property worth $333,000.

 

Because many New Zealanders (Buy and Hold investors) invest in property for capital growth, if you have the choice between achieving 5% capital growth on a $500K asset or a $333K asset, it will be a much better use of your $100,000 deposit if you invest in a new property.

 

Lower Maintenance – more certain cashflow

Because brand new homes are … new, they don’t require as much maintenance. And when they do require maintenance or repairs they are typically smaller and easier to forecast for.

 

This means they have more consistent cashflow because you’re less likely to have to replace a $3,000 hot water cylinder or replace a $20,000 roof.

 

Better quality tenants and lower vacancy

Because new houses are more desirable and comfortable to live in, you can be more selective of the tenants you want to live in your property.

 

This means that you are typically able to secure better quality tenants and can choose people who want to live in the property longer term.

 

This has two benefits – 

 

  1. because you have a more respectful tenant, they’re less likely to cause damage to the property, which is going to limit your maintenance expenses in the future,
  2. because you have lower vacancy, due to the fact you can be selective of your tenants, you will have higher income than you otherwise would.

 

More certain capital growth

The most important prerequisite to achieving capital growth is owning a property that other investors or home buyers want to buy.

 

Because newer homes tend to be more desirable you can usually be more certain you are going to achieve capital growth on your property, and you can expect it will be easier to sell when it comes time to move on from your investment.

 

The drawbacks of investing in new properties

Limited ways to add value

If your strategy is based on renovating properties, then new properties are not going to be the right fit for you.

 

That’s because new properties come fully kitted out – there is no value to gain in landscaping the property or re-painting the rooms within the house – it’s already all done.

 

This means that new properties are a longer-term investment than existing properties, where you can make quick gains if you are willing to put in the work.


Existing properties

What existing properties are

Existing properties are like second-hand cars – they’re good properties, but they have been owned by another person previously.

 

Drive down the street and you will see existing properties everywhere. These are pretty much every property you will see on TradeMe or in the Property Press.

 

Whatever house you live in, that’s an existing property.

 

The benefits of investing in existing properties 

Existing properties are the flip side of the coin of new properties. i.e. the drawbacks of buying a new property tend to be the benefits of investing in an existing property.

 

Similarly, the drawbacks of investing in an existing property and the benefits of buying a new property. For instance, existing properties:

 

Have opportunities to add value

Existing properties have a lot more opportunities to add value to the property, such as changing carpets, painting rooms, adding rooms and landscaping.

 

This means that if you want quick equity gains, and have the cash to invest (above and beyond your deposit) then existing properties are the right fit for you.

 

There straight away

Because existing properties have already been built – as soon as you buy them you can rent them out.

 

This isn’t the same for new properties. Many new properties won’t be ready to tenant straight away (because they are still being built, or are yet to be built).

 

The drawbacks of investing in existing properties 

Less Accessible to Purchase

Because the Loan to Value Ratios are different for new and existing properties, purchasing an existing property requires a higher deposit than the equivalent new property requires.

 

For instance, say you want to purchase a $500,000 property. If you bought this property new you would require a deposit of $100,000 (based on a 20% LVR). However, if you bought an existing property you would require a $150,000 deposit.

 

This means that investors who have a limited deposit (or limited ability to leverage against a property they already own) are better off buying new properties rather than existing properties.

 

Higher and Less Predictable Maintenance

Existing properties have higher and less predictable maintenance because you can’t be sure of what has happened to the building over the decades that it has been standing.

 

Some of the chattels within the property will likely have worn out and will require replacing, and this is likely to result in higher maintenance bills over time.

 

Lower Quality Tenants

Because existing properties aren’t as desirable as newer properties, you can generally expect to be less selective about your tenants when you have invested in an existing property compared with investing in a brand new property.

 

This can result in higher maintenance bills and vacancy rates over time, which have a direct impact on the income the property generates each year and the expenses you have to pay.

 

Where to find properties – time to go shopping 

At this point in the article, you have chosen a strategy, you’ve got an idea about the deposit you can pull together, and therefore how much you can invest in a property. You probably have a city in mind that you think makes a great investment, and also are thinking about the type of property to invest in.

 

It is now time to go shopping.

 

Let’s continue with the retail example. There are different shops you can go to in order to find properties. Each shop has a slightly different range and provides a different level of customer service.

 

Here is a quick overview of the different places you can go to find investment properties –


Property advisors

 

A common way for  prospective investors to find properties is through a property adviser.

 

Property advisors manage the whole property investment process for you. This includes looking at your financial position, creating your property investment strategy, and then locating properties that fit within your investment strategy.

 

And often Property Advisors have Authorised Financial Advisors and Registered Financial Advisors on staff, who are accredited to put these strategies together for you.

 

They often don’t charge a fee for their service, instead receiving a commission from the owner of the existing property (more about how this works below).

 

Opes Partners (the website you are currently on) is an example of a property advisory company.

 

You can also find other property advisors by searching for “Property Investment Companies NZ” on Google, and you will see a range of potential advisory companies you could use.

 

Because property advisors offer a fully managed process, they are typically used by Buy and Hold investors who don’t want to be active in their properties and don’t have the time, money or skills to renovate.

 

Because of this, property advisors tend to recommend new homes because these types of properties are a better fit for hands-off investors.

 

If renovation and flipping is a part of your strategy, then property advisors are likely not the right fit for you.

 

However, if you want to be a hands-off investor who wants the financial benefits of owning investment property, without the hassle, then property advisors are a good option – especially since they don’t charge for their service.


Websites

Websites are often the starting point most people use when they start looking into investment property.

 

Because these two websites are already household names, it won’t surprise you that two of the best websites to look at are TradeMe and Realestate.co.nz.

 

However, there are other websites that are worth looking into, including oneroof.co.nz and homes.co.nz. You can also look at any of the main real estate agency websites like Ray White, Harcourts, Bayleys, and Barfoot and Thompson (Auckland only).

 

Although, be aware, most of the properties these websites will show are existing properties. So if your strategy relies on purchasing existing properties and flipping or renovating them, then this is a good place to start.

 

However, if through this article you’ve decided that new properties are the best fit for your financial position or investment profile, then there are likely to be fewer opportunities available through these websites.


Property finders

Property Finders are an alternative to Property Advisors.

 

The difference is that property finders often do not put your property strategy together for you, or spend much time educating you on property investment. Because of this they are often not Authorised or Registered Financial Advisors.

 

Nonetheless, if you already know the requirements you have for an investment property, and have a strategy, a Property Finder will source that property for you.

 

They often charge a fee ($10,000 - $15,000 + GST) for sourcing the property, which you would pay on top of the purchase price you pay for the investment.

 

Property Finders are the right choice if you have very specific investment property requirements (and know what those are) and don’t want to spend the time sifting through investment options yourself.


Direct to developer 

If you are convinced that you want to buy a new property but don’t want to go through a Property Advisor, then you can also approach property developers directly.

 

Developers will often specialise in particular types of developments or areas, so the developer you choose should be based on where you are looking to invest (Google will be your best friend here).

 

One thing to note when talking to developers is that while they are specialists in the individual properties and developments, few have a team dedicated to property investment.

 

This means you will need to create your own financial projections and assessments of the property (whereas a property finder or advisor would do this for you).

 

You will also need to be aware that property developers have a product to sell, and so will only push their own developments.

 

Even if you choose to go directly to a developer, then it is worth seeking professional financial advice.

 

Before you buy – Run the numbers on your property

Once you have found a property that you think makes a good investment, you’ll want to run the numbers on the property to see if it stacks up.

 

If you are already working with a property adviser or an accountant then they will do this for you.

 

However, you can also use online calculators and software, if you have chosen not to use these professionals.

 

Many of the banks have property investment calculators on their websites, such as Westpac and ASB.

 

However, because you can add a lot of different figures into these, they can be hard to navigate.

Chapter 5: Assemble a Team

Step 5: Assemble a Team of Professionals To Help You

New Zealand has a culture of Do It Yourself (DIY), and we don’t always like to seek or pay for help.

 

We’d rather stumble, figure it out, and do it on our own.

 

Purchasing an investment property is one of the largest financial decisions you may make in your life.

 

You don’t want to mess this up or get it wrong.

 

Because that will cost you … a lot.

 

That’s why there are several advisors and professionals you should use when getting into investment property. This chapter will walk through all the advisors you might need, along with how they get paid and what the benefits are of using them.

Mortgage broker

What a Mortgage broker does

Mortgage Brokers act as your representative to the banks.

 

They study the bank’s policies and rules and aim to understand which banks will lend to what types of people (and on what properties), and they will negotiate with the banks to ensure you get both the lending and the best interest rate possible.

 

The cost of not using a Mortgage Broker

If you don’t use a (good) mortgage broker, you may end up talking to banks who won’t lend to you. This might be because you don’t fit within the types of people or properties they like to lend on.

 

If you do this and then get rejected by multiple banks, then other banks won’t lend to you, because they can see that you’ve been denied finance. This may mean you are not able to secure finance for your investment property, after trying to do it yourself.

 

You may also end up with a higher interest rate than if you went to a mortgage broker, which means that your investment property has higher expenses (and is, therefore, more expensive) than if you talked to a broker.

 

What a Mortgage Broker costs and how they get paid

Generally, mortgage brokers don’t cost you anything.

 

That’s because mortgage brokers are typically paid by banks. The banks generally want your mortgage, so if a broker secures your lending, the bank will pay them a commission.

Insurance broker 

What an Insurance Broker does

Insurance Brokers are very similar to mortgage brokers – they act as your representative to insurance companies.

 

They learn about each company’s products and rules and can recommend the right product and level of cover for you.

 

The cost of not using an Insurance Broker

If you don’t use a (good) insurance broker, you may end up buying the wrong insurance or may end up purchasing an insurance product that has terms and conditions (i.e. fine print) that makes it hard for you to claim on that insurance when you need it.

 

What an Insurance Broker costs and how they get paid

Like mortgage brokers, insurance brokers/advisers typically get paid a commission from the insurance company when they help you purchase the right type of cover for you.

 

This means they don’t cost you anything to use or to get advice from. That’s why it is worth having them on your side.

Solicitor

What a solicitor does

Your solicitor will make sure that you are sorted from a legal perspective.

 

They’ll look over your sale and purchase agreement (the contract you use to purchase the property); the LIM Report (Land Information Memorandum), which is a complex document from your local council with everything they have on record about the property; and they’ll make sure you have all the right clauses within your contracts to make sure you are protected.

 

The cost of not using a Solicitor

It is highly risky not to use a solicitor.

 

You may end up buying a property that you don’t fully understand e.g. legally what happens if there is a shared driveway. You may also accidentally agree to clauses which aren’t in your best interests.

 

What a Solicitor costs and how they get paid

Solicitors charge a direct fee for their services, so when buying a property you can expect to factor this in.

 

Different lawyers will charge different amounts, so it’s best to ask. But we would usually budget for between $1300 and $2000 (including GST).

 

Property accountant

What a property accountant does

Frankly, property accountants used to be more important than they are now.

 

This is because – until recently – property investors could claim a tax credit back from the government. These rules were recently changed, and this meant that there is less work for the accountant to do.

 

None-the-less, property accountants are still important because they will file your tax returns with the government and IRD, and ensure that the numbers behind your investment stack up. 

 

Remember, succeeding in property investment is less about the property and more about the investment (numbers).

 

The cost of not using a property accountant

If you try and do your own property accounting you will need to free up a lot of your own time after work and on the weekends to try and learn how to file the paperwork yourself, and to find the right tools to track all the financial data you’ll need to analyse.

 

What a property accountant costs and how they get paid

Like solicitors, property accountants charge fees for their services. So investors pay them directly.

 

While the fees charged by property accountants differ from firm to firm, it is safe to budget between $600 - $1200 (including GST) per year.

Property manager

What a property manager does

Property managers manage your investment on your behalf.

 

They’ll find a tenant for you; make sure the tenant pays their rent on time; ensure the tenant looks after the property; organise any maintenance for you; and regularly inspect the property.

 

The cost of not using a property manager

Every property investor should use a property manager.

 

If you don’t, you will have a lot more worries about your properties and tenants. You’ll spend a lot more time dealing with your properties, which causes stress and may make you limit the size of your property portfolio.

 

For instance, most property investors know they need to do regular property inspections, but fail to do so.

 

If you don’t inspect your property every 3 months you will have broken the terms of your insurance, and if something goes wrong you may not be able to make a claim.

 

If you would like more evidence on why you need a property manager, join the Property Investors Chat Group NZ on Facebook. You will see the distress and worry investors have when they ‘cheap out’ and try to manage a property themselves. Just take a look at a few screenshots below.

What a property manager costs and how they get paid

Property managers generally charge two types of fees.

 

The first is a percentage of the rent that you get paid.

 

This is typically somewhere between 6.95% (+GST) and 10% (+GST). For a property that charges rent of $500, that’s about $40 - $57.70 per week, or $2,000 - $2,820 a year (factoring in three weeks for the property being empty).

 

They then also charge a letting fee every time the property is vacant.

 

This is to advertise the property, find a tenant, and get that tenant to move in.

 

This is a relatively new fee, as letting fees were previously charged directly to tenants before a recent law change. This cost is now typically passed on to landlords.

 

Letting fees are typically one week’s rent + GST, which for a $500-a-week property is $575. 

Property advisor

What a property advisor does

Property Advisors find and source property investment opportunities for you to purchase. They typically fall into two categories – property finders, and property advisors.

 

Property finders search for properties that meet your buying criteria, or that fit within your existing strategy (and charge you a fee to do so).

 

Property advisors also find properties that meet your requirements and strategy, but they also help you create that strategy. Typically, property advisors do not charge for their service (Opes Partners fall into this category, where we help people create property strategies, find the right properties, and don’t charge a fee for this service).

 

The cost of not using a property advisor

If you choose not to use a property advisor you will need to find the property on your own. The risk here is that the property that you choose may not make a good investment.

 

You may end up purchasing property that doesn’t fit with the long term objectives that you are trying to achieve (especially if you are purchasing property without a written-down strategy).

 

What a property advisor costs and how they get paid

Property finders (who follow your existing strategy) typically charge a fee. This is generally 2% of the property price + GST, or a fixed fee (somewhere between $10,000 - $15,000 + GST).

 

Property advisors, on the other hand, are paid like a stockbroker – they are paid by the existing owner of the property they recommend. This means that most property advisors (like Opes) don’t charge you a fee when you use their service.

Chapter 6: Finance Your Investment

Step 6 – Run The Numbers and Sort The Finance

We’re into the final steps. Here’s everything you’ve achieved so far:

 

  • You’ve decided on your property investment strategy
  • You’ve set your budget
  • You’ve chosen a city to invest in
  • You’ve gone out and looked at properties
  • You’ve found a team of professionals to help you

 

The final hurdle (and you may not have to worry about this if you’ve found the right mortgage broker) is getting the funds for the investment and making the numbers work.

 

This chapter is broken into 2 sections: 

  • Securing the initial funds for your investment (ensuring you can buy the property)
  • Making the numbers work week to week (ensuring you can hold the property over time)


Get funds for the investment 

The most important part of purchasing an investment property is securing the funds from the bank to buy the investment.

 

Some investors are surprised to learn there are different types of mortgages they can use to secure the loans, and that the most common loan property investors use is not the same one they use for their home.

 

The two types of loans are:


Principal and Interest 

The most common type of loan is a Principal and Interest loan (also called a table loan). This is the type of loan that most people use for their homes.

 

Each payment you make to the bank includes the interest payment the banks charge for giving you the loan (e.g. 4%), and some part that pays down the ‘principal’ of the loan. Paying that extra ‘principal’ part means the size of the loan goes down each month.


Interest Only 

The other type of loan – which is much more common in property investment – is the interest-only loan.

 

With this loan you only pay interest to the bank each month, and no principal payment. This means that the size of the loan never decreases.

 

You might wonder two things:

 

  • “How do you ever make money if you’ve always got a mortgage?”
  • “Why would anyone use this type of loan if it never goes away?”


If your property investment strategy includes holding the property, then you must remember that the main source of value in property investment is the property going up in value over time.

 

So, if you purchased a property for $425,000 in 2014, and financed that property on an interest-only loan, then you will have still made $160,000 in capital gain even though you still have a mortgage (because New Zealand property prices went up by 6.6% annually over the last 5 years).

 

This is how investors can build wealth without paying down debt.

 

The other reason investors use this type of loan is that it is cheaper than a principal and interest loan (because there is no additional payment to the principal).

 

Over a 30-year average, this can be a saving of $192 per week based on a $600-a-week mortgage.

 

By saving this $192 per week, more New Zealanders can become property investors (because it is cheaper), or they can grow their portfolios and purchase other properties because they are making this saving.

 

The ability to save on payments to the bank is also of value to investors who renovate properties. And the reason for that is that while an investor is renovating a property, they typically can’t tenant it.

 

This means that decreasing their contributions to the bank (through an interest-only loan) is going to give them more funds to spend on the renovation, while limiting their outgoings.

 

Making the finances work week to week

 

If your strategy includes any amount of holding, the vast majority of any equity gain you achieve will happen over time.

 

This means you need to make sure you can afford to hold the property over the long term.

 

The most important consideration here is your rental yield.

 

A yield is a percentage ratio that calculates how much the property earns you each year as a percentage of the property’s purchase price (what it cost you to buy the property).

 

Go to a property investors’ event and you will no doubt hear everyone talking about yields. The trouble is there are different types of yields, so it is useful to know which one is being talked about and what they each mean.

Gross Yield

 

Your gross yield is the most common term you will generally hear from property investors when they talk about yields.

 

This is calculated by dividing the rent the property earns each year by the purchase price.

 

Although gross yield is often the most talked about, it is also the least useful. That is because it’s not important how much a property earns before expenses, it is important how much a property earns after expenses i.e. what the property actually earns you.

 

Potential Rent vs. Actual Rent

 

The other important distinction to note when calculating gross yield is the difference between the potential rent each year and the actual rent you receive.

 

What’s the difference?

 

Potential rent is the maximum amount of rent you can receive each year. This is calculated by taking the rent you plan to charge each week and multiply it by 52 (the number of weeks in the year).

 

Say that you had a property that is rented out at $500 a week. Your potential rent each year would be $26,000 ($500 x 52).

 

However, we know that you will likely not always have a tenant in your property every week of the year.

 

So it is generally accepted that you will count about 2-3 weeks of ‘vacancy’ each year where you don’t have a tenant (and therefore don’t have an income for those 2-3 weeks).

 

In this example, your actual rent would be $24,500 per year ($500 x 49, accounting for 3 weeks vacancy).

 

It's important to know the difference because it has the potential to skew your yields.

 

Let’s pretend that the property we are discussing cost $500,000 to purchase. If you were to calculate your gross yield based on your potential rent each year, you would have a yield of 5.2% ($26,000 / $500,000).

 

However, if we accounted for the potential rent, your gross yield would then be 4.9% ($24,500 / $500,000).

 

The latter is a much more realistic picture.

 

When analysing an investment property, it’s important to be conservative and realistic, rather than starry-eyed. 

 

If you purchase an investment property based on rosy assumptions that don’t turn out to be accurate, then you may end up needing to sell the property prematurely. That would mean that missing out on the equity gains you were hoping to achieve (which is generally the main reason for purchasing property).


Net Yield

Net Yield is a much more useful tool than gross yield. It tells you how much the property will earn you each year, or, how much it will cost you each year after expenses have been taken out.

 

This is calculated by taking the rent received each year and deducting the annual expenses, before dividing that figure by the property’s purchase price.

 

For instance – you’ve got a property that cost $500,000 and earns $500 per week. It has current expenses of $450 per week.

 

This means that the property earns a profit of $50 per week, or $2,450 per year (with 3 weeks vacancy, and accounting for no costs while the property is vacant).

 

This means that this property earns a net yield of 0.49% each year ($2,450 / $500,000).

 

This is what we’d call a ‘positively geared’ property (or a cashflow positive property), because once its expenses are taken out it earns you money.

 

It’s important to note, too, that yields can be negative.

 

If the property was purchased for $500,000, earns $500 per week in rent and has expenses of $550 per week, then the property makes a loss of $50 per week, or -$2,450 per year.

 

This means that the property earns a net yield of -0.49% each year. This is what is called a ‘negatively geared’ property (or a cashflow negative property), because once its expenses are taken out it earns a cash loss each week.


Why would anyone purchase an investment property that has negative cashflow?

You may be wondering why anybody would invest in a property that is negatively geared and incurs a cost to the investor each week.

 

I can hear you saying: Its an investment – shouldnt it be earning me money?

 

That is how many investors felt a few decades ago – so investors only considered positively geared properties.

 

However, it has become more popular, as investors have realised t there is more long-term wealth to be gained by focusing on the increase in value per week of the property, rather than on the net yield of the property.

 

This is why a new ratio has been created that not only includes the cash the property earns each week, but the equity it earns each week too. This is called the Net Gain Ratio.


Net Gain Ratio

The Net Gain Ratio is a calculation that Opes uses to help investors understand the total gain the property earns an investor each year.

 

This is a more realistic metric for investors to consider because it measures the entire return of the property each year (both in cash and equity terms).

 

The way this is calculated is by adding the annual net yield (in cash, not percentage), plus the estimated gain in property per year, and then dividing that figure by the original purchase price.

 

Let’s map this out.

 

If a property was purchased for $500,000, earns $500 per week, has $550 of expenses each week (pretend that both already account for vacancy, just to keep things simple). And then, let’s say the property increases at 5% each year.

 

This means that annually:

  • The property earns rent of $26,000
  • The property has expenses of $28,600
  • The property has a cash loss of $2,600 annually, and that
  • The property increases in value by $25,000 in the first year ($500,000 x 5%).

This means that the net gain of the property in the first year was $22,400 (equity - cash loss, i.e. $25,000 - $2,600).

 

Dividing this by the purchase price of $500,000 gives us a net gain ratio of 4.48%.

 

This is the total value the property earns the investor in the first year, once all expenses have been taken account of.

 

This is a much more useful ratio than net or gross yield because it accounts for both the cash the property earns or loses each year, as well as the equity gain – where net and gross yields only account for cash movements.


Income and Expenses

We’re now going to break down the different ratios and map out the exact income and expenses line items that you should account for each year.

 

Income

 

The obvious (and now only) form of income most investment properties receive is rent each week.

 

This is income you receive from the tenant for letting them live in your property.

 

Continuing with the above example, a $500,000 house earning $500 a week in rent, with 3 weeks vacancy, earns $24,500 a year in rent.

 

Expenses

 

The not so obvious part when estimating cash flow is the expenses properties incur. 

 

There are typically 8 expenses you’ll incur in owning an investment property:

 

Interest Costs

The most expensive part of owning a property is the interest costs you pay to the bank because they lent you the money to buy the asset.

 

Interest rates are very low right now, so say you negotiate a 4% interest rate, on a 100% mortgage you would pay $20,000 in interest every year ($500,000 x 0.04).

 

That’s the bad news.

 

But, the good news is that:

  • because you pay these interest costs you’re able to afford an investment property to sort your retirement, and
  • While the other costs (below) will go up by around 2% each year, due to inflation, the interest cost will stay the same each year. That’s because loans aren’t impacted by inflation (assuming interest rates don’t change). 

This is why many properties might start negatively geared and eventually turn into positively geared properties – because the rent increases, but the biggest expense stays the same.

 

Property Management

This is the cost to have your property looked after by a professional. It is safe to assume a 7% + GST rate per year. On this $500/week property, that is $1,972 in the first year.

 

Insurance

Landlords need to have insurance in case of damage to the property.

 

Many landlords couldn’t afford to cover any significant amount of accidental damage to their property, so this must be accounted for.

 

For a back-of-the-envelope calculation, this can usually be estimated at 0.3% of the property’s value. In this case, $1500 annually.

 

Maintenance

Maintenance can be hard to predict if the property has been built more than 20 years ago, because you don’t know when chattels will break and need replacing.

 

A few good ballparks to use, based on the age of the property are:

  • $500 in the first year for a brand new property
  • $1,000 for a property built between 10-20 years ago, and
  • $2,000 for a property built over 20 years ago.

We’re going to assume that this is a brand new house, so maintenance would be $500 per year.

 

Rates

Rates are a property tax that is charged by the local council to pay for local services e.g. sewage, water and public amenities.

 

For back-of-the-envelope calculations, you can generally estimate these at 0.48% of the property’s value. In this case $2,400 for the $500,000 property.

 

Letting fees

Although letting fees are only charged when a tenant moves out, it is good to budget for them every single year, just in case.

 

It’s better to budget conservatively and have more money at the end of the year, than budget too little and have to put in unexpected funds as the investor.

 

This would be $575 for this property (1 week’s rent + GST).

 

Accounting

Although this differs from firm to firm, a good estimate is $1,000 a year + GST ($1150 total).

 

Body Corporate / Residents Association

This is usually only charged if you have purchased a townhouse or apartment because these property types tend to share services.

 

These are usually between $1,000 - $2,000 per year.

 

In this example, we are assuming this property is a stand-alone house, which means that there would be no body corporate fees.

 

Adding it all up

 

Income

Rent – $24,500

 

Expenses

Interest – $20,000

Property Management – $1972

Insurance – $1500

Maintenance – $500

Rates – $2400

Letting Fees – $575

Accounting – $1150

Body Corporate – $0

 

Total Expenses – $28,097

 

Cashflow = -$3597

 

In this case, the property is negatively geared and loses $3597 each year.

 

This equates to $69 per week, and the owner of the property would need to transfer $69 each week into their property’s separate bank account, which would be used as needed to cover expenses.

 

At the same time, the property is expected to earn $25,000 in capital gain in the first year ($481 per week).

 

This means that it has a Gross Yield of 4.9%, a Net Yield of -0.72% and a Net Gain Ratio of 4.28%.

 

Because the owner of this property invested no cash when purchasing the property (i.e. they secured the deposit for this property from their home), the only money they have put in to own this property is $69 per week.

 

And for that $69 per week, the property goes up in value by $481 per week on average.

 

This is a 6x return on the investor’s cash.

Chapter 7: Take Action

Step 7 – Make Like Nike, and Just Do It

At this point, you will have:

  • an idea of what you can afford to invest
  • the city you want to invest in
  • the sort of properties you want to invest in
  • the types of property you want to invest in and where to find them
  • started to pull together the team that will support you on your investment journey
  • as well as have started to know how the numbers behind the property will work. 

You’re ready.

 

The next step is to take some action, get in contact with a property advisor, real estate agent, or developer and view some properties.

 

The next steps are simple: 

  • make an offer
  • sign a sale and purchase agreement
  • and go from there


Believe it or not, this is the step where most people stumble and fail in property investment. They learn and learn …. and learn some more, but never get started.

 

So, if you are looking for a helping hand, or need a kick to get started, then you can talk to us at Opes.

 

We are property investment advisors and can coach you through the actions within this guide, while handling the hard parts for you.

 

You can find out more about our three-step property coaching programme here


Chapter 8: Build a Portfolio

Step 8 – Build a Property Investment Portfolio

The final step after you have bought your first investment property is to do it all again and build a property portfolio. 

When you start to buy multiple investment properties you can make them work together as a unit.

For instance, if you invest in a property that is positively geared – like a dual key apartment – then you can also invest in a negatively geared standalone house, in a market that requires contributions from the investor (like Auckland).

 

You could then use the cash flow from the apartment to offset the contributions from the standalone house.

 

There are a lot of different property investment portfolio strategies you could choose to adopt (which is where the real fun starts), and we’ll keep expanding this guide to include these in the future.

 

Which brings us to the final chapter in this property investment guide –

Chapter 9: The Future of this Property Investment Guide

A Quick Note on The Future of this Property Investment Guide

This is the first version of this guide – not the forever version.

 

Over time we are going to update this with more information, links, photos, videos and calculators.

 

We’re also going to add more information about how to read a cash flow statement, how to negotiate, how to build a portfolio, how to handle tenants and a rundown on property legislation.

 

If you have any other ideas or suggestions for how to make this property investment guide even better, please contact Ed, the co-author of this article, at [email protected].

 

We’re interested in hearing your comments, feedback, ideas and suggestions. 

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