Property Investment
2 min read
Author: Andrew Nicol
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Local council rates have been climbing across New Zealand. But which council has the cheapest rates for property investors?
Because, as a property investor, it doesn’t matter how much the council charges you each year.
What matters is how much of your rental income gets eaten up by rates.
Imagine 2 investors. They own properties in different parts of the country, but both get a $3,000 rates bill each year.
Investor A’s property rents for $600 a week. And Investor B’s property rents for $400 a week.
The rates bill is exactly the same in dollar terms.
But Investor A’s property takes 5 weeks of rent to pay the rates.
Investor B’s property takes 7.5 weeks.
So the rates are 50% more expensive for Investor B, relative to rent.
That’s the key point.
For investors, “cheap rates” doesn’t always mean the lowest rates bill.
It means the lowest rates burden.
Here is an interactive map where you can look at the average rent and average rates for your area:
We can see that some of the cheapest rates in the country are in:
And the most expensive rates are in:
Let’s look at a real example.
Napier City Council’s average annual rates bill is $665 higher than Invercargill City’s.
But the median rent in Napier is $177 higher per week.
So it takes 5.5 weeks of rent to pay the rates in Napier, and 6.1 weeks of rent to pay the rates in Invercargill.
This is a trend we see again and again. Smaller towns tend to have higher gross yields (annual rent as a % of your property’s value). But, they can also come with higher costs. And rates are just one example.
After all, every council needs a mayor, a chief executive, councillors and staff.
That’s true whether the district has a population of 5,520, like Mackenzie District, or 1,816,000, like Auckland.
But those fixed council costs are spread across a smaller population, fewer households, and often fewer ratepayers.
That can push the rates burden higher.
Kaikōura District, one of the most expensive areas in the country by this measure, has a population of just 4,340.
So while some smaller towns may look attractive based on gross yield, investors need to check whether higher rates and other costs reduce the actual return.
Just keep in mind that council rates are just one of the essential costs you’ll pay as an investor. Each of these costs will differ based on the property.
That’s why, if you're evaluating a property, you need to run a cashflow with all costs included.
This allows you to see the bottom line … and know how much a property will earn or cost you per week.
Some investors will argue in favour of investing in smaller districts. This is because they have higher gross yields, but they also have higher costs in some cases.
When running the numbers on an investment property, don’t make the gross yield the first thing you look at.
Instead, figure out how much money is left once all the costs are paid (cashflow).
After all, gross yields are vanity; cashflow is sanity.
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.
This article is for your general information. It’s not financial advice. See here for details about our Financial Advice Provider Disclosure. So Opes isn’t telling you what to do with your own money.
We’ve made every effort to make sure the information is accurate. But we occasionally get the odd fact wrong. Make sure you do your own research or talk to a financial adviser before making any investment decisions.
You might like to use us or another financial adviser
