Property Investment NZ – The Epic Guide To Property Investment

A Simple Guide to Property Investment.
Last Updated: 10th September 2021.

Introduction

Introduction to this Property Investment Guide

If you want to learn about property investment in New Zealand - this is the guide for you.

What you are about to read is the most comprehensive, useful, and completely-free resource in the country that teaches you how to invest in property.

It is also a living article. It gets updated constantly and over time we’ll develop it even further so it’s even more comprehensive and interactive. This means adding more videos, updating calculators, including images, and deep-diving into topics.

We do this for you; this is your resource, so whenever you have a question along your investment journey you can refer back to this guide.

Here's a quick video from Ed, one of the guide's co-authors, introducing what you'll learn here:

Chapter 1 – The 2 Main Strategies

Step One – Choose Your Property Investment Strategy

When you strip out the detail, there are only two tried-and-true residential property investment strategies investors tend to use.

The strategy you choose will determine the actions you take.

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

The ‘Buy and Hold’ strategy involves purchasing property and holding it for the long term.

You might buy these properties and rent them out straight away. Or you might renovate the properties before renting them out.

Either way, the focus here is on holding these properties for the long term and making money as they increase in value.

The alternative strategy is ‘Buy and Flip’. This involves investing in a property that needs some work, undertaking the required renovations, and then immediately selling the property on.

The focus here is on making money through renovation activity.

Neither strategy is better than the other. They can both be used to achieve your property investment goals over the long term.

The question is: which is the right strategy for you?

Property Investment Strategies NZ

Strategy #1 – ‘Buy and Hold’ Property Investment

‘Buy and Hold’ is the most common strategy property investors use in New Zealand. This is for several reasons. It‘s a way to make extra money in addition to your usual income; it’s the least time intensive of the two and, while you are holding on to the property, you can still achieve that extra money through cashflow and the property increasing in value.

This strategy makes investment accessible and realistic for everyday New Zealanders who have kids, jobs and busy lives, whereas a ‘Buy and Flip’ strategy requires you to continually find new properties to do-up and sell.

In essence, the ‘Buy and Hold’ is a strategy that is achievable alongside your main job.

‘Buy and Flip’ is like taking on an extra job.

The 'Buy and Hold' Strategy Explained

For an investor who chooses the ‘Buy and Hold’ strategy, you will: purchase an investment property, (in some cases investors will renovate but not always), and then rent it out.

Once the property is rented, you will primarily make money from the property going up in value, which is 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 already in generally good condition and won’t need expensive maintenance in the foreseeable future.

For example, there isn’t an impending roof replacement or a broken hot water cylinder around the corner. These are the sorts of things that cost a lot of money and don’t increase the value of the property or rent the property can achieve.

Buy and Hold Property Investment Strategy Pros and Cons



Why Investors Like ‘Buy And Hold’ Property Investment

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

1. It Is The Least Time Consuming

‘Buy and Hold’ investing can be a ‘hands-off’ strategy.

If you decide to focus on properties that can be rented straight away, like New-Builds, then you can begin your property investment journey without picking up a paint brush.

Even if you decide to go down the renovations pathway, once your property is renovated, it still becomes a set-and-forget approach.

With ‘Buy and Hold’ you continue to make money for as long as you own that property. But when you flip properties, you don’t own them for very long so you need to continue buying, renovating and selling properties if you want to keep earning money.

Because the property investors who choose the ‘Buy and Hold’ strategy are looking for a hands-off investment, they will often bring other professionals in to help them manage it.

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 can also be the more accessible of the two strategies.

There are two reasons for this:

Firstly, this strategy can require the least amount of upfront money/capital to get started. Secondly, it also requires the least amount of background knowledge in the property or building sector.

How?

Let’s say a ‘Buy and Hold’ investor decides to invest in a New-Build. These types of properties only require a 20% deposit to secure bank lending.

But, for those who choose the ‘Buy and Flip’, the investor needs to purchase ‘existing’ properties, which require a 40% deposit to get bank lending. On top of that, people who ‘Buy and Flip’ need to fund their renovation costs.

To give an example, say you want to purchase a $600,000 property. If it’s a New-Build (the type some ‘Buy and Hold’ investors might purchase) then you need a 20% deposit. This means you need $120,000 to purchase the property.

But if you want to flip this property then you’ll need a 40% deposit, which is $240,000. On top of that, you’ll need to have the renovation funds, which could be $30,000 (as an example).

So, in this example, the person going with the ‘Buy and Hold’ strategy needs $120k worth of deposit to get started. Compare this to the $270k for the ‘Buy and Flip’ investor.

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, at the bare minimum, 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 more than that to execute a ‘Buy and Flip’.

For instance, you would need to know: The types of renovations needed to cost-effectively add to the property’s value; how to carry out those renovations; and where to source building materials.

3. It’s The Least Risky

There’s a saying in property that “time heals all mistakes”.

It’s alluding to the fact that property prices have tended to increase over time. So, even if a ‘Buy and Hold’ investor botches a purchase or a renovation, if the market increases in value, you’re less likely to lose money.

‘Buy and Flip’, on the other hand, requires you to buy and sell properties in the same market. The time between you purchasing the property, renovating it, and selling it again is often short. So, you tend not to achieve much ‘capital gain’ over that time.

Another reason ‘Buy and Hold’ investing can be considered less risky is because not all investors of this strategy choose to renovate. This means there is often less background knowledge needed to execute a ‘Buy and Hold,’ so you are less likely to mess it up, or spend money in areas that don’t make the property go up in value.

Drawbacks Of The ‘Buy And Hold’ Property Investment Strategy

The main drawback of following a ‘Buy and Hold’ is you don’t get the money straight away.

Let’s say you renovate a property and it increases in value by $50,000. You might feel like Sir Bob Jones – NZ’s most famous property investors – and think: “I just made a ton of money.”

But that equity is often locked in the property. Yes, the property has increased in value, but it doesn’t mean you can go and spend the money.

Whereas under a ‘Buy and Flip’ strategy, because you sell the property once the renovations are complete, you have the money to spend. If you want to use some of those profits on your personal living costs – that’s an option you can take.

What It Takes To Be Successful With The ‘Buy And Hold’ Property Investment Strategy

1. Buy A Property That Is Likely To Go Up In Value Over Time

Because 'Buy and Hold’ investors primarily rely on the market to increase the value of the property over time, the investor needs to ensure the chosen property is likely to achieve capital gain.

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

2. Ensure You Can Hold The Property Over The Long Term

Being financially able to afford your property over the next 10+ years is essential for ‘Buy and Hold’ investors who rely on the property market to increase the value of their investment.

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 (i.e. the property may be negatively geared).

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 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. At a minimum it requires no background or specialist knowledge and can require the least amount of money to get started.

It’s also a strategy that tends to complement your day-time job, whereas a ‘Buy and Flip’ strategy can easily turn into a second fulltime job.

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 many Kiwis 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, like The Block.

On the show couples renovate an old property, increasing its value over a few weeks and then sell the property for a profit … taking potentially tens of thousands of dollars home.

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

The 'Buy and Flip' Strategy Explained

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 then resell the property immediately after purchasing, which is the ‘flip.’

The main difference between the two strategies:

  • How you access the money you make
  • What type of houses you choose to invest in.

For example, under the ‘Buy and Flip’ strategy the money you’ve made in the property is released straight away. By that we mean once you sell the property you have access to the funds rather than them being locked into the house in equity.

Also, because you’ll be less concerned about the ongoing maintenance of the house you are investing in (e.g. a roof that needs replacing in 5 years), this will affect the type of property you go looking for.

Buy and Flip Property Investing Pros and Cons NZ

Why Investors Like ‘Buy And Flip’ Property Investment Strategy

1. Immediate Equity Gain

While not all ‘Buy and Hold’ investors renovate, almost all ‘Buy and Flip’ investors will.

Successfully executed, a ‘Buy and Flip’ strategy is the quickest way to create immediate capital gain (equity) within the property, because once renovations are finished the property is worth more.

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 and then sell for a profit.

This strategy can often be used by investors who are just starting out and need more equity to become ‘Buy and Hold’ investors.

2. You Get The Money Straight Away

If you buy a property, renovate it, and then sell it, you get access to the profits straight away (after tax).

It’s an immediate pay-off, whereas under the ‘Buy and Hold’ strategy, your pay-off is down the road through long-term capital gains and cashflow.

3. Personal Satisfaction / Thinking It Looks Good On TV

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

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

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

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

Just to be really clear, some ‘Buy and Hold’ investors will also renovate. The key difference between the ‘hold’ and the ‘flip’ is whether you keep the property after it has been renovated.

Hold = keep the property. Flip = sell the property.

Drawbacks Of ‘Buy And Flip’ Property Investment Strategy

1. ‘Buy And Flips’ Is “One And Done”

The biggest drawback of a ‘Buy and Flip’ strategy is that once you sell the property, you don’t make any more from it.

While that sounds obvious, it means you don’t get any of the benefits from holding the property over the long term. There is no enjoyment from long-term capital gains from the house increasing in value, or receiving cashflow through rent from future tenants.

2. Projects Go Over Budget

Sadly many, if not most, construction projects go over budget and cost more than originally anticipated.

But, if you are executing a ‘Buy and Flip’, going over budget has the potential to make the entire investment unprofitable and in some instances not worth the time you’ve invested.

Let’s say you invest in a property that needs electrical work. It can be hard to know exactly what needs to be done to fix an electrical error before you purchase the property.

Once tradesmen start work they might find there are other, unanticipated issues, that require more work, time and cost to complete.

3. 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 the work you undertake might not be completed correctly, but there’s also a risk you might ‘over-capitalise’. This is when you undertake work and spend time and money in areas that don’t increase the value of the property.

4. Takes Time And Can Be Stressful

Most renovation projects require the investor to make many of the improvements themselves. This is because without the investor’s own labour, some 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.

5. You Will Usually Need To Buy A Property In Your City

Because ‘Buy and Flip’ investors usually complete most of the repairs and maintenance themselves, it’s therefore impractical for an investor to buy outside the city they live in (most of the time).

The result of this could be missing out on better opportunities outside of their home city.

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

However, if they want to flip a property, they may find this difficult if there isn’t the right stock in their town. 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 You Can Add Value To With Your Skills

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

  • Have the ability and budget to fix/improve
  • Will increase the property’s value

2. Gain Knowledge About Doing Renovations And The Construction Sector

Some understanding of the construction sector, so you can undertake the repairs and maintenance required, is a big plus. If you don’t have this knowledge already, you can start learning. Here are a few resources we recommend:

  • Property Investor Chat Group NZ – a Facebook group with many investors who like to talk about how to improve an investment property’s value
  • Property Apprentice – a New Zealand property education company which educates New Zealanders (for a fee) on 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 and expertise to conduct renovations.

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 Investment

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

  • A cash deposit
  • Or you need to own your existing home (or other property) to be able to use the equity within that property as your deposit.

There are some exceptions to this, which we will go through below, but those strategies tend not to be used as often.

Most property investors will begin their portfolio either using a cash deposit or an existing home to get started.

The reason you need a deposit in property investment

The reason you either need a cash deposit or equity from your own home is because most New Zealanders who invest in property can’t purchase a property outright.

What we mean by this is if you want to purchase an investment property worth $600,000, you probably don’t have $600,000 lying around spare in your bank account.

Instead, you need to get a mortgage from a bank to purchase the property.

However, banks won’t typically lend an investor 100% of the money to buy the house. So, you need a deposit.

This is really basic, but it’s important to understand the reason why investing in property is the way it is.

Why banks won’t 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 lend you a 100% loan secured against a single property.

Financial Prudence

When a bank lends you money, you’ll need to pay interest on this amount each year. This is what the banks charge for lending you the money to buy the house in the first place.

You decide whether you pay this monthly, weekly or fortnightly.

If you don’t make your mortgage payments, the bank will repossess the property. In other words, they’ll take it off you and sell it to get their money back.

You then receive any leftover money after they have been paid back (minus any costs to sell the property, like real estate agent fees).

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

Why Property Investors Need Deposits and the Impact on Property Investment in NZ

Because The Reserve Bank Won’t Let Them Via Loan To Value Ratio Restrictions

The other reason you need to pay a deposit is the government requires you to, through the Reserve Bank. This is due to the Loan to Value Ratio restrictions (LVRS).

These new rules were first introduced in October 2013 to calm rising house prices in Auckland. Needless to say, they didn’t work.

Technically, these LVR restrictions limit the amount a bank can lend you compared to a property’s purchase price or value. The flipside is they set minimum requirements for how much deposit home buyers and property investors need in order to make a purchase.

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

Auckland House Prices and the Impact on Property Investment in NZ

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

The amount of deposit an investor needs to buy an existing property under the Loan to Value Ratio is currently 40% as of September 2021.

However, it is important to know there are ways to work around the Reserve Bank’s rules and purchase property with a lower deposit.

For instance, new-build properties bought directly from a developer are exempt from LVR restrictions. The rules don’t apply.

So, in practice, you can purchase a new-build investment property with just a 20% deposit.

But we’ll talk more about the strategies you can use to purchase with a lower deposit shortly.

However, before we do, you need to know these restrictions will change over time.

Since this guide was originally written in 2019 the LVR restrictions have moved from 30%, to 0%, back to 30% and then again to 40%, where they sit today.

And they have moved at least 7 times since they were first introduced.

History of LVRs in NZ And Impact on Property Investment

What’s the key message here? The Loan to Value Ratio restrictions can, and will, change over time. So keep an eye out. If they loosen, perhaps you’ll be able to make a purchase. If they tighten, you may no longer be in a position to invest.

The deposit you’ll need under LVR restrictions

The LVRs in New Zealand are currently:

  • 80% for your own home or holiday home
  • 60% for an investment property
Deposits You Need to Invest In Property In NZ

Put simply this means if you’re buying a property to live in yourself, the bank can lend you up to 80% of the property’s value as a loan. So, you’ll need a 20% deposit.

However, if you’re buying an existing home as an investment property, the bank will only lend you up to 60% of the property’s value as a loan. So, you’ll need a 40% deposit.

Yes, property investors require a deposit at least twice the size of owner-occupiers.

Let’s jump into an example. Say you want to purchase a $600,000 property.

If it is a personal home for you to live in, you need a $120,000 deposit (20% of $600,000).

But, if you want to buy the property as an investment, you need a $240,000 deposit (40% of $600,000). Twice the size.

This is why some first home buyers will purchase a property to live in for a short time, converting it into an investment property later - especially if they can’t afford to buy in their ideal location. More on these strategies in a moment.

How to buy an investment property with a lower deposit

There is a catch with all of these LVR rules. They don’t apply in every situation and there are exemptions.

For instance, brand new properties, such as new-builds, don’t come under the rules.

This means if you purchase a brand new property for investment purposes you only require a 20% deposit. 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.

Incentivising investors has two main perceived benefits:

  • Fewer landlords will buy existing properties (this means less competition for first home buyers and owner-occupiers who are searching for homes to live in)
  • More new properties increase the supply of housing (this should help to keep house price inflation in check).

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.

To give you another example, let’s say you have a $100,000 deposit and you want to buy an investment property.

If you choose to invest in an existing property the maximum price you can pay is $250,000. That’s broken down into your $100,000 deposit (40%) and the $150,000 the bank will lend you (60%).

That $250,000 isn’t going to buy you much at all.

But if you were to purchase a new-build as an investment property, then the maximum price you can pay is $500,000. That’s $100,000 of your deposit (20%) and the $400,000 the bank will lend you (80%).

If you want to figure this out quickly, you can use the equity and leverage calculator on our website. Or, play around with the one below.

But if you’re out at open homes looking at properties, here’s how to do the math in your head or on your phone.

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 0.4 (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’re considering and multiply the purchase price by 0.4 (if it is an existing property), or multiply it by 0.2 (brand new property).

Now, at this point you might be thinking:

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

Absolutely, so in the next section we’ll talk about how to find/create your deposit.

How to use your home as the deposit for your next investment property

Right at the start of this article we said there are two ways to get your investment deposit.

You could either use cash, which is the obvious way. Or, the way most people fund the deposit for their investment properties, through the equity within their own home.

Let me explain.

Over the last 5 years (from July 2016 to July 2021) the average New Zealand property increased in value from $600,000 to $922,000 – an astonishing $322,000 increase, according to Property Value and CoreLogic data.

So, let’s say you bought a house in 2016 for your own use. If the house was priced at $600,000, under the LVR restrictions at the time, you would likely have taken out a mortgage of $480,000 (80% of $600,000).

House Price Increases – The Gains From Property Investment in NZ

This means when you bought the property, you used a $120,000 deposit. This means you now have $120,000 worth of wealth or equity within the property.

You calculate this equity by taking the value of the property, and subtracting the loans that are secured against the property.

How to Calculate Equity Within an Investment Property

One of the greatest benefits of buying property is although you only have $120,000 worth of equity initially, as the house goes up in value you get to keep 100% of the increase in value (what’s known as ‘capital gain’).

Now, let’s return to 2021 and talk about the two things that would have happened between 2016 and 2021.

1. You would have paid down some of your mortgage

Over the last 5 years you would have paid off a small part of your mortgage.

Let’s say your $480,000 mortgage was set up on a 30-year loan term at an interest rate of 4% and you were making the minimum payment each month.

After 5 years (2021), your mortgage would have gone down to $434,000. So you would have paid off just under $46,000 worth of debt. Yes, I know it doesn’t seem like a lot after 5 years, but that’s the facts.

But something else also happened.

2. Your property increased in value

As we have said, because of value increases that average house price tag is now $922,000 (as at July 2021). So, if you had bought the average house, you would have received $322,000 worth of capital gain.

So, let’s re-run the numbers to see what equity you now have.

You have a house worth $922,000 and a mortgage of $434,000. This means that your $120,000 deposit has grown to $488,000 worth of equity (an asset) within your home.

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

Here’s a video walkthrough of how to do it from Opes Partners Managing Director Andrew Nicol. But, if you prefer to read, we’ll also write it all out below ...

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

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

Now that your house has gone up in value from $600,000 to $922,000, you can borrow more money against 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.

You can then use the extra money as the deposit for an investment property.

Borrowing against this equity effectively unlocks cash within your home (‘dead money’ as we like to call it) and means you can begin to invest and get a return from it.

Because your house is now worth $922,000, multiplying this by 80% means you can get a mortgage of up to $737,600.

However, because you already have a mortgage of $434,000, you can’t take out another $737,600. You can only take out the difference.

In this case you’d be able to get an additional loan of up to $303,600 ($737,600 - $434,000).

This is why property investment is so accessible to many New Zealand homeowners, because you may already have a deposit sitting there ready to invest.

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

OK, we’re on the home stretch now.

Here’s the situation: You’ve got $303,600 to use as a deposit. What can you do with it?

Well, it depends on whether you buy a new-build or an existing house.

If you buy an existing property, then you could purchase up to $759,000

$759,000 = $455,400 (60% loan) + $303,600 (40% deposit).

Existing Investment Property Example

However, if you were to buy a new-build property then you could purchase an investment property worth $1,518,000.

$1.518m = $1,214,400 (80% loan) + $303,600 (20% deposit).

New Build Investment Property Example

Now in practice you’re probably not going to go and buy $1.5m worth of new-build properties, but you might buy 2 new-build properties spread around the country.

For instance, you might buy a $850,000 new-build townhouse in Auckland and a $650,000 townhouse in Christchurch.

So, it’s not like you need to spend it all on one property.

What if I can’t pull together a 20% - 40% deposit?

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 your deposit together.

There are a few things you can potentially do to pull together a deposit if you aren’t able to meet the 20% threshold for a new-build investment property, by either savings or equity.

1. Get Creative With How You Pull Your Deposit Together

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 young people pull a deposit together 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 that 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 a rental property.

This works the same way as the example above, where the existing mortgage is ‘topped up’ 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 also gone up in value since they’ve owned it.

This means they have likely gained equity for you to potentially use.

If this applies to you, your parents could borrow against their home to help you make a purchase.

Most parents and children then work out an agreement about how that money would be paid back. Typically, the younger person would make the repayments on the mortgage the parents have lent 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 we didn’t mention is these restrictions don’t apply to all bank lending.

The rules actually state some of the banks’ lending can be to high LVR borrowers.

This means if you have a deposit, but it’s not at the 20% or 40% required, you can still get a loan, but you’ll be classed as a high LVR borrower.

Right now, up to 20% of bank lending to owner-occupiers can be ‘high LVR’ (less than 20% deposit).

For instance, we frequently see first home buyers purchase a home to live in with just a 10% deposit. This could be converted to an investment property at a later date if the purchaser wants to.

There are the same rules for investors, but they’re not frequently used. So, up to 5% of each bank’s lending to investors can be ‘high LVR’ (less than 40% deposit). However, we don’t see banks often approving these types of loans.

Instead, you might like to consider a non-bank lender. These financial institutions will lend you money to invest, but they are not considered a bank and so don’t come under the LVR restrictions.

It’s not unheard of for an investor to purchase an existing rental property with a 20% deposit when using a non-bank lender.

However, just be aware that these sorts of lenders will charge higher interest rates, which you’ll need to factor into your calculations.

The best way to work through these sorts of situations and secure these types of loans is through a mortgage broker.

Mortgage brokers keep up to date with the bank’s policies and know which lender is offering money to different investors right now.

If you are in this situation you should definitely talk to a good broker. Remember, most mortgage brokers are paid by the banks, so their services are free. More on this below.

Chapter 3 – Choose a City

Step 3 – Look For a City to Invest In

So, you have chosen a property investing strategy and have an idea of how much you can afford to invest. Now, it’s time to decide where to look for an investment property.

This chapter will focus on the Buy-and-Hold investment strategy for finding and analysing properties, as this is the more common strategy. If you’re a Buy-and-Flip investor, the way you look for properties will be different.

Why You Need To Look At Cities Before You Look At Properties

 

Property investors are, effectively, going into business for themselves - a business that provides rental accommodation.

Now, the reason residential property is an attractive asset is because you can earn money in two different ways because you are operating in two separate markets.

Simultaneously you can achieve:

  • Capital gain through increases in property prices, because you operate in the market for buying houses
  • Regular, weekly income from the rental market, which covers the majority of the costs of owning the asset.

Because your property investing business will operate in these two separate markets, you need to ensure the property you choose (your product) can work in both.

For this your property needs to achieve:

  • Longterm equity gain
  • A reasonable yield (return) from the tenant to cover your costs

Both of these are market-led. This means you need to start, not by looking at a specific property, but finding the market you want to operate in.

Since each region’s property market operates somewhat independently, you need to choose a city.

Why Is Each City’s Property Market So Unique?

If you choose to live and work in one city, you usually can’t live in a property in another city.

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 or rent in Auckland – maybe Hamilton at a stretch. But there’s no way to practically live in Christchurch.

In economic terms, properties in different cities are not good substitutes for one another. A house in Gisborne is not a good substitute for a house in Auckland, especially if you’re someone who wants to live in Auckland.

So, the property market is very closely tied to the long-term prospects of a city. Do people want to live there? Do people want to move there? Is the population increasing or decreasing? Are enough houses being built to keep up with demand, or is there a supply shortage forming?

This is why before choosing a property to invest in, you must decide which region or city you want to target.

Why Choosing The Right City Is More Important Than The Right Property

When it comes to capital growth, it’s often more important to pick the right city, rather than the right property.

Let’s take another example to illustrate this.

Say you find a great property. It’s well-built, has 3 bedrooms, 1 bathroom and a large section, and it only costs $221,250.

The question now is: Should you invest? The answer: It depends … where is it?

If that property is in a tiny town like Patea (in South Taranaki) where the average house is worth only $221,250 – then the answer is likely to be “no”.

This is because you’re not likely to achieve stable increases in the value of your property over the long term.

Patea as a town has:

  • Limited population growth – the town’s population grew by a measly 43 people between 2006 and 2018. South Taranaki’s population (where Patea is located) is expected to decrease by 1.8% between 2018 - 2043
  • High unemployment (7.1% compared with 4.0% nationally), and few people work full time (31.5%, compared to 50.1% nationally) as at the last census date (2018)
  • Few prospects for an economic rebound

This isn’t to disparage or put down Patea as a place to live. It’s a great little town and Ed – one of this guide’s authors – grew up playing squash at the local club. However, it doesn’t have the fundamental factors most property investors are looking for.

Will property prices ever increase in a small town like this? Yes, there is likely to still be some growth but it will be driven by external factors. For example, low-interest rates and the bump the whole of New Zealand saw after the Covid-19 pandemic.

But, which would give you the greater confidence to invest:

  1. A town where long-term house prices will be driven solely by external factors (interest rates; growth of neighbouring cities pushing people to move to towns where housing is cheaper; a nationwide property boom)
  2. Or a town/city where long-term house prices are driven both by external factors and factors relating to the city itself (more jobs leading to higher incomes, population growth leading to higher demand for housing, tight land supply leading to people moving further from the city centre)

The bottom line is you must find the right town or city to invest in first, before you start looking for the right property within that city.

So, how do you do that?

Below we outline the 6 factors to look for when choosing a city or town to buy an investment property in.

Note: All the data shared below is available free elsewhere on this website. So be sure to check out our property market pages to dig further into the data.


6 Factors To Analyse When Choosing A City For Property Investment

1. Is The Region Overvalued Or Undervalued?

It’s often said all assets (including property) move through economic cycles. Sometimes prices are booming and there is confidence in property. Other times that confidence wanes and prices start to droop.

Property Cycles and How They Impact Property Investment in NZ

But, as we said above, because properties in each city aren’t good substitutes for one another, each region operates within its own property cycle. To say this in another way, property prices in Auckland might be going berserk, while those in Wellington are relatively flat. This happened between 2012 and 2016.

However, between 2016 and 2020, Wellington property prices increased quickly while Auckland remained stagnant.

So, it’s imperative we as property investors locate regions that are in an attractive part of their property cycle.

The way we do this is by asking:

  • In the long-term, where have a region’s property prices sat compared with New Zealand house prices as a whole?
  • Where does that particular region’s property prices sit compared with New Zealand’s property prices right now?

Let’s go through an example to talk through the theory of those two points.

Over the last 29 years (1992 - 2021), Southland’s median house price has been 47% of the New Zealand median price.

So on average if the New Zealand median house price was $500,000, Southland’s would be $235,000.

But markets go through different cycles and sometimes a region’s property prices will be above that average. For instance, right now Southland’s median house price is 50.8% of New Zealand’s median price.

So house prices are 7.19% above their long-term average in this model.

Does this mean Southland’s property prices will crash? No.

Does this mean house prices in the region might not increase in the future? No.

But, it means there may be better opportunities in other parts of the country to find a good investment property if we are looking for healthy medium-term capital growth.

So you may wonder, where are the most undervalued and overvalued regions in New Zealand right now?

Here’s a list of NZ’s 15 most populous regions with where they sit under this model:

If you’re looking for the most up-to-date data, you can find it in the property markets’ section of this website. Here’s a list of the regions we cover:



2. Which Part Of Each Region Is Most Undervalued?

It’s all very well finding an undervalued region, but some parts of that region may be more undervalued than others.

Let’s not forget, some of New Zealand’s regions are massive. The Waikato region, for instance, goes all the way from the top of the Coromandel Peninsula down to the bottom of Turangi in the Taupo District. That’s over a 4-hour drive.

So, we need to break the larger regions down into council areas to better target our search for investment properties.

For instance, here is the Canterbury region broken down into each council area. The map then shows where each council area is within its property cycle.

You can see the most undervalued region as at July 2021 was Waimakariri, which is 26.55% below its long-term average.

Whereas the MacKenzie District is 25.28% above its long-term average.

Both districts are in Canterbury, which is seen as undervalued by this model. However, right now, one district appears to be more attractive for property investment compared with the other.

3. Population Growth – Check 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 it will have increased in price.

One indicator of this is population growth. More people = more demand for housing = higher house prices. You can see that trend in the data when we graph annual population growth with annual house price growth.

So, it is important to look at the projected population for the city you are analysing.

Take the Auckland property market over the 19 years between 2000 - 2019.

Between those years, 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 – which is 250%.

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

What is that going to do to the demand for housing? How will that impact house prices? What will higher numbers of people in the city do to rents?

Well, it’s likely to have a positive impact on property investors who already own property in the city.

By now you are probably also picking up population growth is often distributed around a region. What do we mean by that?

Well, over the next 25 years (2018 - 2043), Canterbury’s population is expected to grow by about 19%. But that doesn’t mean the population in every part of Canterbury is going to increase by that amount.

Take a look at the breakdown of population growth by council area.

Here you can see some areas are expected to see enormous population growth. Selwyn District’s population is projected to grow 60%+ over this period, while Kaikoura’s population is projected to shrink 4.36% over that time.

What’s the lesson here?

As well as looking for a good region to invest in, you also want to dig deeper to consider what’s happening in each council area.

4. Economic Strength – Can People Afford Increased Property Prices?

The other side of having more people in the city is ensuring they have the income 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)

There are a couple of ways economists try to track economic strength. GDP, which is growth per person (per capita), is something you’ll often read about in the papers.

But what you really care about isn’t how much businesses are doing in a region. What you do really care about is the income real families are earning. This where you might consider average (mean) household income growth.

Let’s talk about the Bay of Plenty region, since they haven’t got a mention so far in this guide.

Over the 21 years between 1998 and 2019 (the years we have current data for) the average household income in Tauranga increased 4.14% per year.

Over that same time-frame, household incomes in the Kawerau District (a small district also in the Bay of Plenty) grew by only 2.99%. That’s the slowest in all of New Zealand.

So, if you were considering an investment property in the Bay of Plenty region, putting all other factors aside, which would you rather invest in? Which area is going to be able to support higher rents? Which area will have the income to support higher house prices? Which area is likely to be more prosperous in the future?

If you’re like most property investors, you’ll probably gravitate towards Tauranga in this instance.

5. Rental Yields Vs House Prices – Making Sure You Can Hold The Property Over Time

There’s a joke in property investment circles, which is: “You can’t use capital gains to pay your mortgage”.

It’s true, even if your property is increasing in value, you still need to be able to pay the mortgage. You’ll really feel the pain if you purchase a property where the rental yield is so poor you have to pay tens of thousands of dollars a year to top up the bank account.

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

This is 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 $611 for three bedroom homes, according to Barfoot and Thompson (August 2021). But the average sale price for that type of property was $1,060,000. That is a 3.0% gross yield (accounting for no vacancy).

Whereas Rolleston has an average rent every week of around $490 for 3 bedroom homes, and the average sale price for 3-bed homes is $675,000. This is a 3.77% gross yield.

This means it is much more affordable to Buy-and-Hold in Rolleston over the long-term. Not only is there a cheaper entry price, but there is relatively more income achieved each week to pay for expenses. Some expenses, like interest payments to the bank, are often proportional to the price of the property bought.

But this doesn’t mean you shouldn’t buy in Auckland. It just means if you do invest in Auckland, you need to be aware 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 still useful when analysing a city or suburb to invest in.

6. Affordability – Where Can You Actually Afford To Buy An Investment Property?

So, finally, you’ve found a good city with good fundamentals. Now you need to make sure you can actually afford to purchase there.

The affordability of housing changes drastically around the country, and even within a region.

For example, take a look at the Waikato region to see how affordability can vary.

The average property in the Waikato region sold for $711,000 in July 2021, according to REINZ.

But the average property value in the Thames-Coromandel District is $1,085,000 (the most expensive council area in the Waikato), and the average property in the Waitomo District is only $300,389, according to propertyvalue.co.nz.

So, property investors will find some areas very affordable, but other areas more expensive. It’s important to keep this in mind as you’re searching for rental properties.

What’s Next?

On your quest to look for high-quality investment properties, it’s important to note: Not every city or region is going to tick every box on this list.

After looking at the data, you’ll need to make a judgement call about where you believe is the best place for you to invest. That will be different for each individual.

For instance, if you have lots of money to invest, you might choose to purchase in Auckland. Property prices there are high and yields relatively low. But it’s got high population growth, good incomes and abundant industry.

If your affordability is low, on the other hand, you might only be able to purchase in a region where both prices, income and population growth are lower.

But, armed with these tools, you should be able to analyse a region and then make an informed decision.

If you would like extra credit, your next step might be to start digging into suburb level data, which means identifying specific areas where you want to look for investment properties.

That’s where you might look at a pair of maps, like the ones below, to identify suburbs that have had high capital growth in the past, and also relatively high yields.

For instance, here is a map of Auckland showing the suburbs that have achieved the highest capital growth between January 2000 and today.

And here is a map showing the current gross yields broken down by suburb.

This suburb level data is broken down for each of the four main cities in New Zealand – Auckland suburbs by price, Wellington suburbs by price, Christchurch suburbs by price, and Hamilton suburbs by price.

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.

Property Investment Page Property Types

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.

The 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).
Property Investment Property Types Example 001

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 with 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 are standalone houses?

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 with 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 is land?

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 are existing properties?

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 are 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 what has happened to the building over the decades.

Some of the chattels within the property are likely to 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 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 advisers

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

Property advisers 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 Advisers have Authorised Financial Advisers and Registered Financial Advisers on their 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 advisers by searching for “Property Investment Companies NZ” on Google, and you will see a range of potential advisory companies you could use.

Because property advisers 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 advisers 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 advisers are likely not to be 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 advisers 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 they are TradeMe and Realestate.co.nz.

However, there are other websites that are worth looking at, 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. If your strategy relies on purchasing existing properties and flipping or renovating them, this is a good place to start.

However, if through this article you’ve decided new properties are the best fit for your financial position or investment profile, 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, it is still 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 the benefits 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 Brokers

Sure, you could go and use the bank's mortgage calculator and try to figure it out for yourself. However, 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 Brokercosts 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 the broker secures your lending, the bank will pay them a commission.

Insurance Advisers

What an Insurance Adviser does

Insurance Advisers 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 Adviser

If you don’t use a (good) insurance adviser, 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 Adviser costs and how they get paid

Like mortgage brokers, insurance 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.

Property-Investment-NZ- -Tenancy-Question

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 adviser

What a property adviser does

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

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 advisers also find properties that meet your requirements and strategy, but they also help you create that strategy. Typically, property advisers 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 adviser

If you choose not to use a property adviser 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 adviser 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 advisers, 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 advisers (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.

Property Investment Calculate Yields
 

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.


Case Study – Gross Rental Yield

Jamie has just bought a property for $500,000. After speaking with his property manager he believes that the property will rent for $500 per week.

Jamie multiplies $500 by 52 (the number of weeks in the year), which gives him rental income of $26,000 per annum.

By dividing $26,000 by $500,000, Jamie calculates his gross rental yield at 5.2%.

The limitations of Gross Yield

Although gross yield is often the most talked about in property circles – given that it is so easy to calculate and compare – it is of limited use.

That’s because Jamie isn’t concerned with how much a property earns before expenses, he cares about how much the property earns him after expenses.

Net Yield

Net Yield is a much more useful metric than gross yield. It tells you how much the property earns (or costs you) each year after operational 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.

Operational expenses include: vacancy (how long the property is without a tenant for), rates, insurance, accountants fees, property management, letting fees and maintenance.

Case Study – Net Yield

Hannah bought a similar property to Jamie's. It was $500,000 and earns $500 per week.

It has operational expenses of $9,572.25 per year. This is made up of:

  • $1500 of vacancy (3 weeks rents at $500 per week)
  • $500 of maintenance
  • $1972.25 of property management (7% + GST of collected rent)
  • $1150 of accountants fees
  • $2700 of rates. And
  • $1750 of insurance.

This means that Hannah’s property makes an operational profit of $16,427.75 per year ($26,000 - $9,572.25).

Dividing that by $500,000 – the purchase price of the property – Hannah calculates that her net yield is 3.3%.

However, this is not profit that Hannah can keep.

That’s because in order to buy the property, Hannah got a mortgage from the bank, which means that she also has interest costs.

Note: Mortgage expenses are not operational costs, and therefore are not used to calculate net rental yield. Leaving mortgage expenses out of net yield is also useful as you can more easily compare different investment opportunities.

Cashflow Yield

Your cashflow yield includes your payments towards your mortgage. This is typically the metric most property investors are interested, as it shows the real money that the investor is either putting into the property each week or able to take out of the property each week.

There are two possible ways to calculate your cashflow:

First Way to Calculate Yield

The first is to simply take your net yield and minus the interest rate from the net yield.

This assumes 100% lending in order to secure the property.

Case Study

Hannah has already calculated that her net yield is 3.3%. She goes to her mortgage broker and is able to secure an interest only loan at 3.5%, which will cover the entire purchase price (100% lending).

By subtracting 3.5% from 3.3%, she sees that her annual cashflow yield is -0.2%.

Multiplying this yield by the purchase price ($500,000), Hannah sees that she will need to top up the property’s account by $1,000 in the first year to hold the property.

Second Way To Calculate Yield

The second way takes a little more arithmetic to calculate, but it doesn’t include the 100% lending assumption.

To calculate this, take the Net Yield (expressed in dollar terms), and minus the mortgage repayments. Then divide that number by the purchase price of the property.

Case Study

Let’s get back to Jaime. He bought a similar property to Hannah and has the same operating costs as her property.

Jaime also goes to his mortgage broker to secure a mortgage. He is able to get the same interest rate than Hannah’s broker was able negotiate – 3.5% on an interest-only loan. However, Jaime has used a 20% deposit.

This means that instead of paying interest of $500,000 – like Hannah – Jaime only has to pay interest on $400,000.

This means that his interest costs are $14,000, rather than $17,500 like they were for Hannah.

Jaime calculates that he will receive $26,000 of rent. He’ll then have $9,572.25 of operating costs and $14,000 of interest costs. This means that the property will have cashflow of $2,427.75 in the first year.

When Jaime divides that cashflow by the property’s $500,000 purchase price, he sees that he has a cashflow yield of 0.49%.

When To Use This Second Method

It’s important to use this second method if you are not purchasing the property with 100% bank lending. Using a deposit will impact your expenses and therefore change your cashflow.

Investment Properties Can Be ‘Positively Geared’ or ‘Negatively Geared'

In this example, Hannah’s property costs her $1,000 a year, and Jaime’s earned him just over $2400 in the first year.

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

Because her property loses money each week, Hannah’s property is a ‘negatively geared’ property (or a cashflow negative property). It’s called this 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: “It’s an investment – shouldn’t 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 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 cashflow yield (as a percentage), plus the capital growth rate of the property per year.

Let’s map this out.

Hannah’s property had a negatively geared property that has a cashflow yield of -0.2%.

Let’s say it is anticipated to increase in value by 5% per year. That means that the property has a Net Gain Ratio of 4.8% ($24,000) in the first year.

Jaime has a positively geared property with a cashflow yield of 0.49%. If his property increases at the same rate as Hannah’s (5%), then his Net Gain will be 5.49% in the first year ($27,450).

Property Investment Yield Example

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 was 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

Operational Expenses

Property Management – $1972

Insurance – $1500

Maintenance – $500

Rates – $2400

Letting Fees – $575

Accounting – $1150

Body Corporate – $0

Total Operational Expenses – $8,097

Interest – $20,000

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 3.3%, a cashflow 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 into 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 adviser, 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 advisers 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

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 the Auckland property market).

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 on 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.