Are you interested in property investment in New Zealand?
You aren’t alone. Investing in property is a topic we Kiwis love to discuss. Whether it’s your parent’s rental property ‘nest egg’ or your mate overseas who’s bought a rental at home while he travels, it’s no secret that us Kiwis love property.
There’s a good reason for it too. Many investors were burnt in the 1987 stock market crash and lost their trust in the sharemarket.
Property, on the other hand, was something you could touch. Something tangible that could be improved. With maintenance and the right tenants, it could bring income for a lifetime.
Property Investment NZ: Beginners Guide to Buying Rental Property
I have owned investment property since 2006. I have learnt a fair bit in that time and I wanted to share more information on this blog. I need to reinforce the fact that I am not a professional or a financial advisor, I’m just an experienced investor sharing my own experiences and some tips and tricks along the way.
How property makes money
Most of us have rented a home in our lifetime. We pay a weekly or monthly amount to a landlord or property manager and in exchange, we are able to use the property for a contracted amount of time. As renters or tenants, we don’t have to worry about things like building insurance, council rates or building maintenance.
Your obligations as a tenant are to keep the property tidy, pay your rent on time and return the property to the condition it was when you moved in (allowing for fair wear and tear).
The landlord has to cover mortgage payments, council rates, building insurance, maintenance and repairs, improvements and property management fees out of the rent received.
In the early days of buying a new property, costs will eat up almost all of the rent received. As time goes on rents increase and the landlord pays down the mortgage, so the amount leftover grows.
This difference in income and holding costs is how the property investor makes money.
Most investors will use equity (the difference between a property’s value and the debt against it) to borrow again and again and repeat the process over and over again.
Now if you know a bit about property, you might be screaming at your computer screen right now. ‘That’s not how it works for me, what is she talking about?!?!’. That’s because when it comes to property investment NZers have varying opinions of what constitutes an investment.
I like to stick to the best and most accurate description of investment:
‘the act of putting money or effort into something to make a profit or achieve a result’ (source)
If you are buying a property and you need to top up the mortgage or put a significant amount of your own funds in to make the numbers work, then you are not making a profit.
You are most likely speculating on future capital gains to justify your purchase. That is totally fine, but it’s not property investment.
Please note, it is very common for people to top up their rental properties. I had to do it for years. It was only recently that I realised that this is not really an investment and the opportunity cost is huge.
Putting $100 a week into topping up my rental portfolio since 2008 certainly adds up. If I had put the same amount of money into the stock market over that timeframe, I would have made a lot more money. Don’t be like me, only buy cash flow positive property.
5 Things to Consider Before You Buy Your First Investment Property
Here are 5 tips to get your property investment journey off on the right foot:
Know your why
The very first step is figuring out exactly why you want to invest in property. What’s your long-term game plan? Early retirement in Bali? You’re going to need multiple cashflow properties. Want to create your own version of ‘The Block’? Buying a do-up in a gentrifying area might suit you better. Knowing your end goal will help you follow the right path.
Start at the local library. There are literally thousands of books on the topic of property investment. If your local branch doesn’t have the books you want, request an interlibrary loan.
There is no need to spend thousands on your property investment education. With plentiful blogs on the topic, plus online forums and the wonderful New Zealand Property Investor magazine, you can find out everything you need to know for low or no cost.
(See the list of recommended resources further down the page)
Construct your team
At the very least you’ll need an accountant, conveyancer or solicitor, property manager, and a builder you trust to call on in case of emergency.
Pro Tip: Even if you plan to self-manage your investment property, pay a professional property manager to complete a pre-purchase rental assessment. For a nominal fee, you’ll get the opinion of an expert in your rental catchment area, who’ll be able to point out the strengths and weaknesses of your potential purchase.
Get your structure sorted
Before you make an offer you need to sort out your ownership structure. Whether you plan to purchase as an individual, as part of a partnership, trust or via a company, discussing your plans with a professional is vital. Your accountant will be able to point you in the right direction.
Have a plan for reducing debt
It’s prudent to have a debt reduction plan in place if you are borrowing to invest in property. Aim to get your loan to value ratio (LVR) under 70% as quickly as possible, to remove any lenders mortgage insurance and/or low deposit premium from your loan. This will see an instant increase in your cash flow and allow you to keep borrowing for more purchases.
How to keep growing your wealth with property investment
After you’ve bought one investment property, you might consider growing your portfolio by adding another.
Leveraging allows you to use the cash you have available to purchase a more expensive property. Let’s say you have $90,000 in cash (or equity in an existing home).
Using debt you can purchase a property for $300,000 using your cash or equity as a 30% deposit. Now you control an asset worth $300,000 for just a $90,000 outlay.
If the property appreciates at a rate of 5% per year, you’ve gained $15,000 in the first year. Compare that with gaining 5% on your initial $90,000 deposit (that would be $4,500) and you can see how powerful leverage is when it comes to growing wealth.
It’s important to note that leverage works both ways. It can amplify losses as well as gains.
2. Rental income
Income from rent is your bread and butter in the property investment game. Rents should rise over time whilst debt reduces, creating positive cash flow to fund your lifestyle and increased servicing capacity.
3. Debt reduction
Some people like to think of property debt as forced savings. Whilst that is an oversimplification, it’s true that paying down any debt you owe on the property as quickly as possible will boost your net worth, therefore increasing your wealth.
4. Tax advantages
If you are a wage or salary earner or self-employed, you can receive tax deductions for expenses relating to your investment property. (Note: this is currently under review)
Paying less tax increases your monthly cash flow, just another way property investment can provide financial freedom. For more information on rental properties and taxation, the IRD has some great resources on their site here.
5. Capital growth
Capital growth is simply the increase in the value of your property over time. Capital growth is how you continue to add to your property portfolio.
As your property grows in value and you reduce debt, you can borrow against your increased equity to buy more investment property.
Property is a long-term investment, and should never be viewed as a way of getting rich quickly. If you buy well, however, your very first property could be worth much more than you paid for it by the time you choose to retire.
Buying cash flow positive investment property in New Zealand
What is cashflow positive property?
Put simply, cash flow positive property pays for all expenses from the rent received. There are a number of ways to achieve this.
Buying cashflow positive property
Buying property that generates a profit from day one is the dream. Generally, this is possible in lower-income areas, regional towns or with smaller apartments. With all three of these scenarios, there is risk involved.
Lower-income areas may have less desirable tenants (and before anyone slams me for this, I live in a low-income area, I’m just stating a fact), regional towns can have massive swings in rental demand (ask me about that time my regional property was vacant for 8 months) and smaller apartments or flats can have high turnover.
Creating cashflow positive property
Another way to make your property cash flow positive is to create it. This simply means you increase the rental income produced from the property.
This could involve buying a larger house and splitting it up into flats. Adding on a bedroom will increase the rent. Subdividing the section or adding a minor dwelling can also increase the amount of income derived from your purchase.
As you can imagine there are costs involved in adding on bedrooms or renovating a property to increase the rent. If you have the time and money/skills available to do this it can work out well.
I personally don’t have the time (as my focus in on my online business) so I have rejigged my position and only buy 2 bedrooms units close to the city centre, which are cash flow positive from the outset.
I still own a 3 bedroom property in a regional area and will likely hold it for the long-term but I won’t buy another like it. Low maintenance units suit my lifestyle. You will find what works for you.
How to calculate the return
Calculating the return on a property is done in two ways. Gross yield is a quick calculation you can do to work out if it’s even worth attending the open home.
Gross yield is simply annual rent divided by the purchase price.
On my most recent purchase this worked out as Annual rent: ($290 * 52)/$190,000 = 0.0793 * 100 = 7.93%.
Net yield includes the costs associated with owning the properties. This is the number you need to work out whether it’s a good investment or not.
Annual rent (15080) – holding costs (5000)/190000 * 100 = 5.30%
Holding costs include insurance, rates and property management fees.
Council rates vary widely in regional and metro areas. As an example, we have a house in a regional town valued at around $110k with an annual rates bill of $3000. One of our rentals in Christchurch is valued at $235k and has a rates bill of $1800.
The Christchurch rental achieves a higher rent and is a much better investment overall, but the purchase price of the regional property was much lower.
Pro tip: Make sure you consider more than just purchase price when assessing a property. Ongoing costs can obliterate your profit.
Property Investment Resources
Since us Kiwis are so obsessed with property, there are a lot of great resources available to increase your knowledge on the topic.
Books and Magazines
The New Zealand Property Investor Magazine is a monthly publication which covers interest stories and investor profiles. It’s a great read. (You might even be able to borrow it from the library)
20 properties in One Year by Graeme Fowler is a must-read. A lot of these books can be requested from the library. See more here
Online forums and Facebook groups
Property Talk is an online forum dedicated to property investment in New Zealand.
Property Investors Chat Group is a Facebook group run by a master investor.
Both of these forums are a wealth of knowledge. Remember, before you ask a question, run a search as most likely someone asked it before.
Property websites like homes.co.nz, oneroof.co.nz and qv.co.nz can give you a lot of free information about a property. I always conduct basic research on a property before deciding to attend an open home. I’ll usually check out sales history and get an idea of rates from the local council.
iFind Property runs a free beginners course in Property Investment. It’s delivered via email. I highly recommend it. Check it out here: https://www.ifindproperty.co.nz/learn/property-course/
How I plan to build wealth with property
I want to share my own story as an example of what not to do! And also to show that even if you make mistakes, if you learn from them, you can come back stronger and smarter and do better next time.
In 2006 I (along with many others around the world) wanted to hop on the credit bubble and buy an investment property. To be fair, I’ve always been interested in real estate and came very close to buying my former family home (simply for nostalgia) for 90k in 2002 when I was a 20 year old with a full-time job. Instead of doing that, I asked for a one-way ticket to Australia for my 21st birthday and moved overseas.
(I really should’ve bought that 90k house. It recently sold for 300k).
In 2006 we (my now husband) purchased a rental property in partnership with my brother and parents. It was a flat for $180,000 in Bexley, Christchurch. Each of us had a ⅓ share at $60,000. We saved up the 10% deposit and landed a great tenant paying $230 a week.
If you’ve read and understood about yield you’ll know this was a 6.33% return. Not great, and certainly not a level I’d buy at now, but we were young and keen to own a rental property.
Although the rental return wasn’t great, there was equity in the deal. My husband and I were able to secure a $20,000 loan against the property as a deposit for our next rental. With this money, we purchased a 3 bedroom house on the West Coast of the South Island. This time, the rental yield was very good. Purchase price was $128,000 and rental income was $230 a week giving a gross yield of 9.34%.
We now had 2 investment properties, both financed with interest-only loans and were young and cocky enough to want a third. We both had good full-time jobs in Australia but we also loved to travel and eat out, so we weren’t great at money management.
Saving was hard but we managed to scrape together enough for a 10% deposit on a one-bedroom unit in Richmond, Christchurch. The purchase price was $123,000 with a weekly rent of $180 for a 7.6% gross return.
At this stage, we had a lot of debt and interest rates were rising, so we put a halt on buying. We still kept paying interest only on the loans (BIG MISTAKE!!) and as our debt wasn’t reducing things started to get tighter. We then started to get vacancies, long ones. I was even interviewed by The Press about needing to drop the rent on our Richmond flat.
We had trouble with tenants on the West Coast where the population is highly transient. Our flat in Bexley was the only safe bet with a great tenant who really looked after the place.
In 2008 we purchased a house in Invercargill. The purchase price was $135,000 with a rental income of $220/week.
After that, buying was put on hold while we paid down personal debt and saved up for a round-the-world trip.
In 2011 we purchased a home we thought we’d like to live in one day. We purposely bought then as we were planning on travelling later that year and wouldn’t be able to get finance without the security of our jobs. Our offer went unconditional three days before the Christchurch earthquake.
When the earthquake hit, all hell broke loose. The tenant vacated immediately, the asbestos roof was damaged and we were stuck with a lemon. The house was badly damaged but we’d put our life savings into it and couldn’t walk away.
I remember sitting in my hostel in Cusco, Peru when the zoning announcement was made. Both our Bexley and Richmond rentals were red-zoned, meaning they could not be rebuilt on the existing property.
My parents were also red-zoned, and our house, specifically purchased to be near them, was in the green zone but near the boundary. We completed the sale and patched up the house to a rentable standard and returned to Australia.
Whilst back in Australia, we purchased from afar again before embarking on another big trip. This time in a more solid location in South-west Christchurch.
We signed all the legal documents in a small notary public (notario publico) office in Merida, Mexico. The woman behind the counter was baffled at us buying a house in New Zealand while travelling in Mexico with a baby.
As time went on, it became more and more difficult to manage the insurance claims from afar. In early 2014 we decided to move home.
Since then we have finalised the claim and sold that large house, accepted cash settlements for both the Bexley and Richmond rentals and are left with 3 properties (2 existing and a new unit we purchased in Christchurch in early 2019).
It is now my goal to purchase a new property each year with the eventual aim of all properties being fully paid off and able to support early retirement for my husband (since I already have a flexible business I don’t intend to retire for a long time).
More Property Investment Tips
If that story hasn’t put you off investing in property here’s some things you should know to ensure you get the maximum benefit from your investment property portfolio.
Keep your borrowing separate
If you borrow to invest in property and use the borrowings solely for the purpose of purchasing a rental property, the interest on that loan is tax deductible. However, interest on loans associated with your private home is not deductible.
Make sure your home and investment property loans are completely separate, otherwise you could have trouble claiming the maximum deduction come tax time.
Hire a professional property manager
Maybe you are trying to run your rental property business on the cheap, and wanted to self-manage? I understand. Cash flow properties are hard to come by these days, so management is a place you can save a few bucks. But hear me out. A good property manager is a vital member of your team.
They can advise on things to improve in the property to get you more rent or tell you problem areas to steer clear of when building your portfolio. In fact, having a property manager carry out a rental income assessment before you buy is a cheap way to get an expert opinion on your property investment purchase. Plus, if you sign a management agreement with them, they’ll often waive their rental assessment fee.
Property management is a tax-deductible expense, so not only is having a professional property manager a great way to save money on your income tax, but it’s like having access to a dedicated industry expert on an ongoing basis. I call that a great investment.
Don’t sell (…for at least 5 Years)
Some investing gurus believe you should never sell. But sometimes you just have to get your money out for whatever reason.
If at all possible, try to hang on to the property for 5 years to minimise tax owing on the property. See more about this here: https://www.gra.co.nz/articles-by-matthew-gilligan/bright-line-rule-faqs
Invest in your knowledge
Much like painting a house, most of the work in property investing is in the preparation. Getting educated, choosing an area to focus on and then finding the right property for the best price that will make you money all take time and resources. Expenses for subscriptions to property investor magazines and property information websites are deductible expenses and will help you to become a more efficient investor.
Investing in property can be a great way to save for your future. With the right education, an investment in property has the ability to generate income in the form of regular rent and potentially net you a capital gain when it comes time to sell. It’s also a tax-efficient investment and can be very enjoyable.
If you have anything to add, please do so in the comments below. I’d love to hear your property investment story.